<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the fiscal year ended _____September 30, 1998_____

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934]

For the transition period from ______________________ to ______________________

Commission file number 0-23084

                        INTEGRATED SILICON SOLUTION, INC.
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

           DELAWARE                                             77-0199971
 -------------------------------                             -------------------
 (State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                              Identification No.)

 2231 Lawson Lane, Santa Clara, California                        95054.
 -----------------------------------------                       --------
 (Address of principal executive offices)                        zip code

 Registrant's telephone number, including area code (408) 588-0800

 Securities registered pursuant to Section 12(b) of the Act:

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<S>                                                <C>
           Title of each class                     Name of each exchange on which registered
 COMMON STOCK, PAR VALUE $0.0001 PER SHARE                  NASDAQ NATIONAL MARKET
 -----------------------------------------                  ----------------------
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          Securities registered pursuant to Section 12(g) of the Act:

                                      NONE
                         ------------------------------
                                (Title of Class)

       Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

       Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

       The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of such stock on November 28, 1997,
as reported by the Nasdaq National Market, was approximately $159.5 million.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

       The number of outstanding shares of the registrant's Common Stock on
December 1, 1998 was 19,417,827.

                       DOCUMENTS INCORPORATED BY REFERENCE

       Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting
of Stockholders to be held on January 29, 1999 are incorporated by reference in
Part III of this Form 10-K.

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                               TABLE OF CONTENTS


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<S>                                                                                                <C>
PART I


Item 1.    Business................................................................................1

Item 2.    Properties..............................................................................9

Item 3.    Legal Proceedings.......................................................................9

Item 4.    Submission of Matters to a Vote of Security Holders.....................................9


PART II


Item 5.    Market for the Registrant's Common Equity and Related Stockholder Matters...............10

Item 6.    Selected Consolidated Financial Data....................................................11

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of
           Operations..............................................................................11

Item 8.    Financial Statements and Supplementary Data.............................................22

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial
           Disclosure..............................................................................44


PART III


Item 10.   Directors and Executive Officers of the Registrant......................................44

Item 11.   Executive Compensation..................................................................44

Item 12.   Security Ownership of Certain Beneficial Owners and Management..........................44

Item 13.   Certain Relationships and Related Transactions..........................................44


PART IV


Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................44


SIGNATURES.........................................................................................47
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When used in this Report, the words "expects," "anticipates," "believes,"
"estimates" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements, which include statements concerning the timing
of new product introductions; the functionality and availability of products
under development; trends in the networking, telecommunications, personal
computer and instrumentation markets, in particular as they may affect demand
for or pricing of the Company's products; the percentage of export sales and
sales to strategic customers; the percentage of revenue by product line; and the
availability and cost of products from the Company's suppliers; are subject to
risks and uncertainties, including those set forth in Item 1 of Part I and in
Item 7 of Part II hereof entitled "Certain Factors Which May Affect the
Company's Business or Future Operating Results" and elsewhere in this Report,
that could cause actual results to differ materially from those projected in the
forward-looking statements. These forward-looking statements speak only as of
the date of this Report. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the Company's expectations
with regard thereto or to reflect any change in events, conditions or
circumstances on which any such forward-looking statement is based, in whole or
in part.

                                     PART I

ITEM 1. BUSINESS

GENERAL

       Integrated Silicon Solution, Inc. ("ISSI" or the "Company") designs,
develops and markets high performance memory devices including static random
access memory ("SRAM"), specialty dynamic random access memory ("DRAM"), and
nonvolatile memory ("NVM"). The Company also designs, develops and markets
embedded memory devices which include voice recording chips and certain
microcontroller devices. The Company's memory devices are used in networking
applications, telecommunications, personal computers ("PC"), disk drives and
other peripherals, data communications, office automation, instrumentation and
consumer products. SRAM products include both asynchronous and synchronous
devices ranging in densities from 64K to 4 megabit. DRAM products focus on high
speed, low density devices with densities of 2, 4, and 16 megabits. Nonvolatile
memory products include Flash memories, EEPROMs (electrically erasable
programmable read only memories), and EPROMs (erasable programmable read only
memories). The Company has its headquarters in Santa Clara, California and
markets its products on a worldwide basis.

       The primary function of high performance SRAMs is to improve the overall
performance of an electronic system by compensating for the disparity in the
speeds of other integrated circuits within the system architecture. As a result,
speed is a key performance characteristic for SRAMs. In many mobile or portable
applications the need for low power is also a key performance characteristic.
Customers also regard cost as a critical factor. For these reasons, in order to
continually improve product performance and reduce costs, the Company must have
access to state-of-the-art process technology for wafer manufacturing and be
able to implement design improvements, such as reduced geometries, on a
consistent basis.

       The Company leverages its SRAM design and advanced complimentary metal
oxide semiconductor ("CMOS") process technology expertise to establish
collaborative manufacturing relationships with Asian semiconductor manufacturers
which use the Company's memory products as a vehicle for the development of
advanced process technology. The Company believes that these relationships
assist in securing access to leading edge process technology and a committed
source for wafer processing. The Company's principal collaborative manufacturing
relationship is with Taiwan Semiconductor Manufacturing Corporation ("TSMC"),
with which it jointly develops process technology for producing the Company's
SRAMs. The Company also has a collaborative program with Chartered Semiconductor
Manufacturing ("Chartered") in Singapore. In addition, the Company has a
manufacturing program with United Microelectronics Corporation ("UMC") in
Taiwan. To further strengthen its manufacturing relationships, the Company has
made an equity investment in a business venture with TSMC and an equity
investment in a business venture with UMC.

       ISSI was founded in 1988. The Company has its headquarters in Santa
Clara, California. This facility focuses on research and development, product
definition, quality assurance and marketing and sales. The Company has majority
ownership of a subsidiary in Taiwan ("ISSI-Taiwan"). ISSI-Taiwan focuses on
manufacturing coordination, quality assurance, product test and regional sales
in the Asian market. See "Recent Developments". 



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The Company also has a subsidiary in Hong Kong that primarily focuses on
research and development and a subsidiary in China which focuses mainly on
marketing.

RECENT DEVELOPMENTS

           In June 1998, the Company sold approximately 46% of ISSI-Taiwan to a
group of private investors. Cash proceeds from the transaction totaled $35.5
million net of withholding and transaction taxes. The Company intends to
continue to use ISSI-Taiwan for the majority of its manufacturing coordination,
testing of wafers, and testing of its memory devices. However, the Company
believes that, in the next decade, more cost efficient testing services may
become available in countries such as China or Vietnam, and could be used by the
Company. The Company expects to sell up to an additional 18% of its interest in
ISSI-Taiwan in fiscal 1999 and, as a result, the Company's ownership interest in
ISSI-Taiwan will be less than 50%. At such time, the Company's financial
statements will not consolidate the results of ISSI-Taiwan but will account for
ISSI-Taiwan on the equity basis and will include its percentage share of
ISSI-Taiwan's financial results. At such time as the Company's consolidated
results no longer include ISSI-Taiwan, there will be a significant decline in
the Company's consolidated revenue, a decline in operating expenses, and there
may be an increase in the Company's effective tax rate. See Note 13 of Notes to
Consolidated Financial Statements.


       In October 1998, the Company transferred its Flash memory business to a
newly formed company, NexFlash Technologies, Inc. ("NexFlash"). The Company
presently owns approximately 32% of NexFlash, ISSI-Taiwan owns approximately
17%, and private investors and management own approximately 51% of NexFlash. The
Company and NexFlash jointly own related Flash intellectual property. The
Company intends that future development of Flash products and the sale of such
products will be done through NexFlash. In fiscal 1999, the Company's financial
results will not consolidate the results of NexFlash, as the Company's ownership
of NexFlash is less than 50%. The Company will account for NexFlash on the
equity basis and will include in its financial statements its percentage share
of NexFlash's financial results. This change is expected to have a minimal
effect on the Company's consolidated revenue and will result in a decrease in
the Company's consolidated research and development expenses. See Note 19 of
Notes to Consolidated Financial Statements.

PRODUCTS

       The Company designs and markets a family of high performance, low cost
SRAMs, high speed, low density DRAMs, as well as NVM products, including serial
EEPROMs, high speed EPROMS, and Voice EPROMs. Flash products are developed and
marketed by a minority owned company, NexFlash. See "Recent Developments". To
date the Company has derived substantially all of its revenues from the sale of
SRAM products.

SRAMS

       The Company offers a family of CMOS SRAMs in various densities, speeds
and packaging configurations. SRAM densities include 64K (8K x 8), 256K (32K x
8), 512K (64K x 8 and 32K x 16), 1 megabit (128K x 8, 64K x 16, 32K x 32), 2
megabit (64K x 32), and 4 megabit (64K x 64 and 128K x 32). The Company produces
both asynchronous SRAMs and synchronous SRAMs. The Company's 2 megabit 64K x 32
synchronous SRAM currently achieves clock speeds of 166MHz. Leading speeds for
the Company's asynchronous SRAMs vary according to density. The 1 megabit 128K x
8 SRAM currently achieves 12 nanoseconds. The 256K SRAM achieves as low as an 8
nanosecond access time.

       The Company's asynchronous SRAMs are used in applications such as LANs,
telecommunications, bridges, routers, modems, multimedia products, and
industrial instrumentation. Additional SRAM products are under development and
are expected to include performance-leading features in speed, configuration,
power levels, density and packaging. The Company's synchronous SRAMs are used
primarily in networking applications. The Company is also developing embedded
memory products, which will combine certain logic functions with SRAM.

DRAMS

       The Company's DRAM products focus on very high speed and low to medium
density devices. The Company currently offers 2, 4, 8, and 16 megabit Fast Page
Mode (FPM), Extended Memory Out (EDO), SDRAM and SGRAM. Applications for such
devices currently include 3D graphics, disk drives, networking, modems,



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telecommunications base stations, and set top box applications. Such devices are
not targeted at the main memory DRAM market.

NONVOLATILE MEMORY PRODUCTS

       The Company's NVM products include high performance serial EEPROMs and
EPROMS. The Company's selection of serial EEPROM devices are used in
applications that require nonvolatile storage of data or code and allow the
information to be modified during system operation. Applications for serial
EEPROMs include pagers, networking systems, modems, telephone sets, security
systems, smart cards, video games and other consumer products. The Company's
EPROM product offerings include 256K, 512K, 1 megabit, and 2 megabit devices.
EPROM applications include modems, printers, digital phones, and
instrumentation.


           Flash memory business, which was transferred to NexFlash, includes
Serial Flash, Parallel Flash and Embedded Flash. The Serial Flash family
includes Serial Flash Memory products ranging in density from 1M-bit to 16M-bit,
and Serial Flash Module products (removable Flash cards) ranging in density from
128K-byte to 4M-byte. Ultra-low-power Serial Flash devices are designed for
storing voice, images or data in applications such as voice recorders, digital
cameras, hand-held terminals, internet appliances, and data loggers. The
Parallel Flash line includes a 1M-bit Flash memory that is the first in a family
of high performance, industry compatible devices used in modems, graphics cards,
and industrial systems. Embedded Flash includes high density Flash memory blocks
that, in conjunction with Foundry partners, are licensed for use in Embedded
Flash applications such as microcontrollers, digital signal processors, and ASIC
controllers.


       The Company has also developed a memory intensive 8051 microcontroller.
Microcontrollers are used in a broad array of electronic equipment for the
command and control logic of appliances, toys or cellular phones. The Company
also produces a voice-recording chip that combines voice algorithm technology in
a Flash based recording chip. Initial applications for this device are in
consumer electronics such as voice recorded greeting cards. Revenue from both of
these products has been immaterial.

DESIGN AND PROCESS TECHNOLOGY

       The Company has invested in advanced process technology that allows it to
design at leading edge geometries such as 0.18 micron for SRAMs. Memory products
are particularly well suited for the development of advanced process technology.
The Company's technology development engineers work closely with the Company's
design engineers and manufacturing partners, such as TSMC and Chartered
Semiconductor, to develop new process technologies, refine existing process
technologies and to reduce the circuit geometries of its products. During 1998,
the Company and TSMC began development of 0.18 micron, 3.3-volt high speed SRAM
process technology. In addition, the Company has developed a six transistor cell
SRAM for low power applications. SRAMs that do not require low power typically
use four transistor cell structures.

       The Company's design efforts focus on product specification, memory cell
and array structure, logic and circuit design, simulation and layout. The
Company has invested in advanced computer aided design ("CAD") systems to ensure
that the design team has state-of-the-art design tools and employs innovative
and rigorous design methodologies. The Company leverages its memory expertise to
design embedded memory products that combine memory and logic.

MANUFACTURING

       The Company combines its process technology expertise, foundry
partnership strategy and equity investment arrangements with TSMC and UMC to
form a hybrid of the fab and fabless business models which it calls
Fab-Lite(TM). The Company does not own or operate its own wafer foundry but
because memory products are particularly well suited for the development of
advanced process technology, the Company actively participates in developing and
refining the process technology used to manufacture many of its products. The
Company believes that this strategy enables it to achieve the early introduction
of advanced geometries for its high performance memory products, which results
in increased performance and lower manufacturing costs. To date, the Company's
principal manufacturing relationship has been with TSMC. The Company also has a
collaborative technology development relationship with Chartered Semiconductor
in Singapore.



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       In 1995, the Company entered into a business venture, United Integrated
Circuits Corp ("UICC") with UMC and other investors to build a wafer fabrication
facility in Hsinchu, Taiwan. The Company currently has an investment in UICC of
approximately $16.5 million and no additional investment payments are due. The
UICC facility was severely damaged by fire in October 1997. It is the Company's
understanding that the damage was covered by insurance. UICC has undertaken a
clean up of the facility, but reconstruction has not commenced as an alternative
site is being evaluated. A decision as to whether to build on the existing site
or the alternative site has not yet been made. The Company believes that its
investment of $16.5 million is recoverable.

       In 1996, the Company entered into a business venture agreement with
Altera Inc., Analog Devices Inc. and TSMC wherein TSMC, as the general partner,
would construct a wafer fabrication facility in the state of Washington. The
fabrication facility is intended to be a very advanced process technology
facility capable of 0.35, 0.30, 0.25 and 0.18 micron process technology. The
joint venture, named WaferTech LLC, began production in 1998 and is expected to
increase production levels in 1999 and 2000. The Company currently has an
investment in the business venture of $31.2 million and no additional investment
payments are due. In December 1998, the Company agreed to sell approximately 33%
of its investment in WaferTech to TSMC for approximately $10.0 million. The
transaction is expected to close in January 1999. Upon completion of the
transaction, the Company will have a 2.67% interest in WaferTech.

       The manufacturing of the Company's products is coordinated primarily by
ISSI-Taiwan, which is located in close proximity to TSMC and UMC in the Hsinchu
Science-Based Industrial Park, a government-sponsored technology development
zone. After receiving wafers from its independent wafer foundry partners,
ISSI-Taiwan performs wafer probe testing, laser repair, and final testing. The
Company's U.S. headquarters develops and debugs test programs and tests
procedures used in Taiwan. Both the Taiwan and U.S. facilities have clean rooms
that are equipped for the wafer probe segment of the testing process. Packaging
and assembly operations are performed by subcontractors, principally in Taiwan.
A comprehensive quality control program is in place in both facilities. The
Company has adopted ISO 9000 as its quality management standard. The Company's
U.S. facility has received certification under ISO 9001 standards. ISSI-Taiwan
has received certification under ISO 9002 standards.

       Each of the Company's wafer suppliers also fabricates for other
integrated circuit companies, including certain of the Company's competitors. In
addition, UMC subsidiaries manufacture integrated circuits, including SRAMs, for
their own account. Although the Company has written commitments specifying wafer
capacities, if a wafer supplier chose to prioritize capacity for other use or
reduce or eliminate deliveries to the Company, there can be no assurance that
the Company could enforce fulfillment of the delivery commitments. The equity
investment arrangements and related purchase agreements by the Company with TSMC
and UMC will provide the Company with guaranteed capacity, and thus are expected
to mitigate this delivery risk in the future. However, since the construction of
a wafer fabrication facility is a lengthy and complex endeavor, there can be no
assurance that the TSMC business venture fabrication facility or the UMC
business venture fabrication facility will be capable of meeting their
commitments. In this regard, the UMC business venture facility was severely
damaged by fire in October 1997 resulting in a delay in wafer production.

       There can be no assurance that the foundries used by the Company will not
encounter construction or production difficulties or that they will allocate
sufficient wafer capacity to satisfy the Company's wafer requirements,
especially in times of wafer capacity shortages. Moreover, there can be no
assurance that the Company would be able to qualify additional manufacturing
sources for existing or new products in a timely manner or that such additional
manufacturing sources would be able to produce an adequate supply of wafers. If
the Company were unable to obtain an adequate supply of wafers from its current
or any alternative sources in a timely manner, its business and operating
results would be materially and adversely affected.

       Although the Company's policy is to work closely with its manufacturing
sources there are certain risks associated with the use of independent
foundries, including the absence of a controlled source of supply, or delays in
obtaining adequate wafer supplies. In addition, the manufacture of integrated
circuits is a highly complex and technically demanding process. Production
yields and device reliability can be affected by a large number of factors. As
is typical in the semiconductor industry, the Company's outside foundries have
from time to time experienced lower than anticipated manufacturing yields and
device reliability problems, particularly in connection with the introduction of
new products and changes in such foundry's processing steps. There can be no
assurance that the Company's foundries will not experience lower than expected
manufacturing yields or device reliability problems in the future, which could
materially and adversely affect the Company's business and operating results.



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       The Company has certain minimum wafer purchasing commitments to its
foundry partners in exchange for wafer capacity commitments. Although the
Company has rights to re-schedule or assign capacity to another party, there can
be no assurance that such re-schedule or assignment would be successfully
accomplished. Should the Company fail to re-schedule or assign unneeded
capacity, the Company's business and operating results could be adversely
affected.

CUSTOMERS AND MARKETING

       The Company's customers include a broad range of electronic system
manufacturers such as Cisco Systems, Compaq Computer, 3Com, IBM, Motorola, and
Seagate. The Company's SRAM products are used primarily in high-speed modems,
local area networks, bridges and routers, PC cache, disk drives, cellular
phones, base stations, and adapter cards. The Company's NVM products have a wide
range of memory applications including high-speed modems, local area networks,
adapter cards, cellular telephones and electronic games. In fiscal 1998, 1997,
and 1996, one customer, 3Com/U.S. Robotics, accounted for approximately 19%,
19%, and 22% of the Company's net sales, respectively.

       In the United States, the Company markets its products through a direct
sales force and independent sales representatives. In addition, the Company has
four distributors in North America. The Company is continuing to expand its
marketing and sales activity in Europe. The Company has sales offices in the
United States, Europe, Japan, Hong Kong, Taiwan and the Peoples Republic of
China.

       ISSI-Taiwan has a direct sales and marketing organization based in
Taipei, Taiwan that is primarily responsible for the Asian market. To date, a
majority of the Company's Asian sales have been to Taiwan customers. The Company
markets and distributes its products on a worldwide basis. In fiscal 1998,
approximately 43% of the Company's net sales were attributable to customers
located in the United States, 18% were attributable to customers located in
Europe and 39% were attributable to customers located in Asia. In fiscal 1997,
approximately 45% of the Company's net sales were attributable to customers
located in the United States, 13% were attributable to customers located in
Europe, and 42% were attributable to customers located in Asia. In fiscal 1996,
approximately 53% of the Company's net sales were attributable to customers
located in the United States, 10% were attributable to customers located in
Europe, and 37% were attributable to customers located in Asia. In fiscal 1998,
1997, and 1996, international sales (sales by ISSI-Taiwan and export sales by
ISSI-U.S.) comprised approximately 57%, 55%, and 47% of the Company's net sales,
respectively. See Note 13 of Notes to Consolidated Financial Statements.

       The Company is subject to the risks of conducting business
internationally, including economic conditions in Asia, particularly Taiwan,
changes in trade policy and regulatory requirements, tariffs and other trade
barriers and restrictions, the burdens of complying with foreign laws and,
possibly, political instability. The Company anticipates that sales to
international customers will continue to represent a significant percentage of
net sales. Substantially all of the Company's foundries and assembly and test
operations are located in Asia. The Company transacts business predominately in
U.S. and New Taiwan ("NT") dollars. Such transactions expose the Company to the
risk of exchange rate fluctuations. The Company periodically monitors its
exposure to foreign currency fluctuations, and has from time to time taken
action to hedge against such exposure, but has not to date adopted any formal
hedging strategy. There can be no assurance that exchange rate fluctuations will
not materially and adversely affect its business and operating results in the
future.

       The Company manufactures and markets primarily standard products and
sales are generally made pursuant to standard purchase orders, which can be
revised to reflect changes in the customer's requirements. Generally, purchase
orders and OEM agreements allow customers to reschedule delivery dates and
cancel purchase orders without significant penalties. For these reasons, the
Company believes that its backlog, while useful for scheduling production, is
not necessarily a reliable indicator of future revenues.

COMPETITION

       The semiconductor memory market is intensely competitive and has been
characterized by an oversupply of product, price erosion, rapid technological
change, short product life cycles, cyclical market patterns and heightened
foreign and domestic competition. The ability of the Company to compete
successfully in the high performance memory market depends on factors both
within and outside of its control, including imbalances in supply and demand,
product pricing, the rate at which OEM customers incorporate the Company's
products into their systems, 



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access to advance process technologies at competitive prices, product
functionality, performance, and reliability, successful and timely product
development, wafer supply, wafer costs, achievement of acceptable yields of
functional die, the gain or loss of significant customers, the nature of its
competitors and general economic conditions. There can be no assurance that the
Company will be able to compete successfully in the future as to any of these
factors. The failure of the Company to compete successfully in these or other
areas could materially and adversely affect the Company's business and operating
results. In addition, the Company is vulnerable to technology advances utilized
by competitors to manufacture higher performance or lower cost products.

       The high performance SRAM market is generally a fragmented market and
specific competitors and competitive factors vary based on geographic regions
and market segments. In the high performance SRAM market, the Company competes
with several major domestic and international semiconductor companies including
Cypress Semiconductor, Integrated Device Technology ("IDT"), Mitsubishi,
Motorola, Samsung, Sony, Toshiba, UMC and Winbond. The Company also competes
with new and emerging companies, such as Galvantech and Giga Semiconductor,
which have recently entered or may in the future enter the market. The Company
also may face significant competition from other domestic and foreign integrated
circuit manufacturers, which have advanced technological capabilities but have
not previously participated in the SRAM market sector. There can be no assurance
that the Company will be able to compete successfully against any of these
competitors.

       In the high speed DRAM area, the Company competes primarily with Silicon
Magic, E-toon, and G-Link. Other main memory DRAM companies could potentially
enter the high-speed market in the future. In the low to medium density DRAM
area, where speed is not the critical factor, the Company competes with
Mosel-Vitelic, Vanguard and Oki. There can be no assurance that the Company will
be able to compete successfully against any of these competitors. In the
nonvolatile memory market, the Company's primary competitors include Advanced
Micro Devices ("AMD"), Atmel, Intel and SGS-Thomson Microelectronics. The
Company also competes with many small to medium-sized companies in one or more
segments of the market.

       Certain of the Company's competitors offer broader product lines and have
greater financial, technical, marketing, distribution and other resources than
the Company. There can be no assurance that the Company will be able to compete
successfully against any of these competitors.

       The process technology used by the Company's manufacturing sources,
including process technology that the Company has developed with its foundries,
can be used by such manufacturers to produce products for other companies,
including the Company's competitors. Although the Company believes that its
participation in the development of the processes provides it the advantage of
early access to such processes, there can be no assurance that the knowledge of
the manufacturer will not be used to benefit the Company's competitors.

PRODUCT WARRANTY

       Consistent with semiconductor memory industry practice, the Company
generally provides a limited warranty that its semiconductor memory devices are
in compliance with specifications existing at the time of delivery. Liability
for a stated warranty period is usually limited to replacement of defective
items or return of amounts paid.

RESEARCH AND DEVELOPMENT

       Rapid technological change and continuing price competition require
research and development efforts on both new products and advanced processes
employing smaller geometries. The Company's research and development activities
are focused primarily on the development of advanced process technologies and
new memory circuit designs. The Company currently designs most of its high
performance memory products and jointly develops advanced process technology
with its manufacturing partners from its headquarters in Santa Clara,
California. The Company's Taiwan and Hong Kong subsidiaries are responsible for
the development of the Company's microcontroller products, voice products and
certain EEPROM products.

       The Company is currently designing new SRAM, DRAM, Embedded Memory and
NVM products. SRAM products under development include low power SRAMs and
additional memory configurations. DRAM products under development include
synchronous graphics DRAMs. Nonvolatile memory products include the development
of additional EEPROM devices and, through NexFlash, Serial Flash products. The
Company's research and development expenditures in fiscal 1998, 1997 and 1996
were $36.9 million, $31.9 million, and $21.4 million, respectively.



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PATENTS

       As of September 30, 1998, the Company held 27 U.S. patents, of which 13
were acquired with the acquisition of Nexcom Technology, Inc. ("Nexcom"). These
patents expire between 2010 and 2018. The Company has approximately 41
additional patent applications pending and expects to continue to file patent
applications where appropriate to protect its proprietary technologies. Although
patents are an important element of the Company's intellectual property, the
Company believes that its continued success depends primarily on factors such as
the technological skills and innovation of its personnel rather than on its
patents. The process of seeking patent protection can be expensive and time
consuming. There can be no assurance that patents will be issued from pending or
future applications or that, if patents are issued, they will not be challenged,
invalidated or circumvented, or that rights granted thereunder will provide
meaningful protection or other commercial advantage to the Company. Moreover,
there can be no assurance that any patent rights will be upheld in the future or
that the Company will be able to preserve any of its other intellectual property
rights.

       In the semiconductor industry it is typical for companies to receive
notices from time to time alleging infringement of patents or other intellectual
property rights of others. The Company has been, and from time-to-time expects
to be, notified of claims that it may be infringing patents, maskwork rights or
copyrights owned by third parties. Although none of these companies have pursued
a claim against the Company, there can be no assurance that other companies will
not in the future pursue claims against the Company with respect to the alleged
infringement of patents, maskwork rights, copyrights or other intellectual
property owned by third parties. If it appears necessary or desirable, the
Company may seek licenses under patents that it is alleged to be infringing.
Although patent holders commonly offer such licenses, there is no assurance that
any licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license under a key patent or
intellectual property right from a third party for technology used by the
Company could cause the Company to incur substantial liabilities and to suspend
the manufacture of the products utilizing the invention or to attempt to develop
non-infringing products, any of which could materially and adversely affect the
Company's business and operating results. Furthermore, there can be no assurance
that the Company will not become involved in protracted litigation regarding the
alleged infringement by the Company of third party intellectual property rights
or litigation to assert and protect patents or other intellectual property
rights of the Company. Any litigation relating to patent infringement or other
intellectual property matters could result in substantial cost and diversion of
resources by the Company which could materially and adversely affect the
Company's business and operating results.

ACQUISITION OF NEXCOM TECHNOLOGY, INC.

       In December 1997, the Company completed its acquisition of Nexcom in
exchange for the issuance of 772,693 shares of Common Stock, $0.5 million in
cash, and the assumption of $1.2 million of net liabilities (total consideration
of approximately $8.5 million). Nexcom was formed in 1990 and has been engaged
primarily in the research and development of non-volatile flash memory
technology. As a result of the merger, the Company acquired 13 patents which
were held by Nexcom. This Flash memory business has been transferred to
NexFlash. See "Recent Developments".

EMPLOYEES

       As of September 30, 1998, the Company had approximately 150 employees in
the U.S. (of which 30 were transferred to NexFlash), 8 in the People's Republic
of China and 14 in Hong Kong. ISSI-Taiwan had approximately 270 employees at
September 30, 1998. The Company's future success will largely be dependent on
its ability to attract, retain and motivate highly qualified technical and
management personnel. The employment market for such personnel is extremely
competitive and there can be no assurance that the Company will successfully
staff all necessary positions. The Company's employees are not represented by
any collective bargaining agreements and the Company has never experienced a
work stoppage. The Company believes that its employee relations are good.



                                       7
<PAGE>   10

EXECUTIVE OFFICERS

       The executive officers of the Company and their ages as of September 30,
1998 are as follows:

<TABLE>
<CAPTION>
      Name           Age                              Position
<S>                  <C>      <C>
Jimmy S.M. Lee       43       Chairman, Chief Executive Officer, President, and Director
Kong-Yeu Han         43       Executive Vice President, Office of the President, General Manager-Taiwan
                              and Director
Gary L. Fischer      47       Executive Vice President, Office of the President and Chief Financial Officer
</TABLE>

BACKGROUND OF EXECUTIVE OFFICERS

       Jimmy S.M. Lee has served as Chief Executive Officer, President and a
director of the Company since he co-founded the Company in October 1988. He has
also served as a director of ISSI-Taiwan since September 1990. From 1985 to
1988, Mr. Lee was engineering manager at International CMOS Technology, Inc., a
semiconductor company, and from 1983 to 1985, he was a design manager at
Signetics Corporation, a semiconductor company. Prior thereto, Mr. Lee was a
project manager at Toshiba Semiconductor Corporation and a design engineer at
National Semiconductor Corporation. Mr. Lee holds an M.S. degree in electrical
engineering from Texas Tech University and a B.S. degree in electrical
engineering from National Taiwan University.

       Kong-Yeu Han has served as the Company's Executive Vice President since
April 1995, as General Manager, ISSI-Taiwan since September 1990 and as a
director of the Company since he co-founded the Company in October 1988. He has
also served as a director of ISSI-Taiwan since September 1990. From October 1988
to September 1990, he also served as Vice President, Engineering of the Company.
From 1985 to 1988, Mr. Han was design engineering manager at Vitelic
Corporation, a semiconductor company, and from 1984 to 1985 he was a staff
engineer at Signetics Corporation. From 1980 to 1984, Mr. Han was a senior
engineer at AMD and its subsidiary Monolithic Memories, Inc. ("MMI"), both of
which are semiconductor companies. Mr. Han holds an M.S. degree in electrical
engineering from the University of California, Santa Barbara and a B.S. degree
in electrical engineering from National Taiwan University.

       Gary L. Fischer has served as the Company's Executive Vice President
since April 1995 and as Vice President and Chief Financial Officer since June
1993. He also served as Vice President, Finance and Administration from December
1993 to April 1995. From December 1992 to April 1993, Mr. Fischer was Vice
President, Finance and Chief Financial Officer of Shaman Pharmaceuticals, Inc.,
a pharmaceutical company. From January 1989 to December 1992, Mr. Fischer was
Chief Financial Officer of Synergy Semiconductor Corporation, a manufacturer of
high performance SRAM and logic integrated circuits. Mr. Fischer holds an M.B.A.
degree from the University of Santa Clara and a B.A. degree from the University
of California, Santa Barbara.

       Officers serve at the discretion of the Board and are appointed annually.
There are no family relationships between the directors or officers of the
Company.



                                       8
<PAGE>   11

ITEM 2.    PROPERTIES

       The Company's U.S. headquarters occupy a two story building, totaling
approximately 93,400 square feet, in Santa Clara, California in which its
executive offices, marketing, technology, product development groups and some
R&D testing facilities are located. The Company's minority owned business,
NexFlash, is located within this facility. The lease on this building expires in
February 2007. The Company subleases approximately 24,000 square feet to a third
party. The sublease expires in March 2000. ISSI-Taiwan occupies approximately
145,000 square feet of a newly constructed 500,000 square feet facility in the
Hsin-Chu Science-Based Industrial Park, which is owned by ISSI-Taiwan.
Approximately 155,000 square feet is leased to other tenants.

ITEM 3.    LEGAL PROCEEDINGS

           On April 22, 1998, the U.S. Department of Commerce ("DOC") published
an amended antidumping duty order on imports of SRAMs from Taiwan from where the
Company currently imports a majority of its SRAMs. As a consequence of this
antidumping duty order, the Company is required to post a cash deposit on
imports of Taiwan fabricated SRAM wafers or devices, at the ad valorem rate of
7.56%. The cash deposits subsequently could be returned to the Company or,
alternatively, the Company could forfeit amounts deposited and owe duties and
interest in addition to the amounts deposited. The outcome is dependent on
whether the DOC conducts an administrative review of imports entered after the
imposition of the antidumping order, and if so, on the results of the DOC
review. The decision on whether to conduct a review will be made in 1999 and the
results of the review will be issued in the year 2000.

           The Company has retained legal counsel to defend and assist in its
interests in the antidumping proceedings. In addition, certain aspects of the
antidumping determination are being challenged in federal court proceedings by
some of the respondents to the investigation, and these proceedings could result
in the termination of this antidumping case. Duties calculated and assessed by
the government could have a material adverse affect on the Company's gross
margins and profits. There can be no assurance that any reviews or proceedings
will mitigate or eliminate antidumping duties.

           On October 22, 1998, Micron Technology filed an anti-dumping petition
against DRAMs fabricated in Taiwan. Currently, the Company's DRAM products are
fabricated in Taiwan. The case is expected to take from 12 to 18 months to
complete. If the petition is upheld, the Company could face DRAM duties, unless
it is able to secure DRAM from outside of Taiwan. Currently, DRAM accounts for
less than 10% of the Company's revenue.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

       There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1998.



                                       9
<PAGE>   12

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET FOR COMMON STOCK

       The Company's common stock has been quoted on the Nasdaq National Market
under the symbol ISSI since the Company's initial public offering in February
1995. Prior to such date, there was no public market for the common stock. The
following table sets forth, for the fiscal quarters indicated, the high and low
sale prices per share for the Common Stock as reported on the Nasdaq National
Market. These prices are over-the-counter market quotations which reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.

<TABLE>
<CAPTION>
                     Fiscal Year ending September 30, 1998                         High              Low
                                                                               -------------     ------------
<S>                                                                            <C>               <C>    
Fourth quarter                                                                   $  7.125         $  2.75
Third quarter                                                                      10.75             6.656
Second quarter                                                                     12.25             7.313
First quarter                                                                      14.50             7.00

<CAPTION>
                     Fiscal Year ending September 30, 1997                         High               Low
                                                                               -------------     ------------
<S>                                                                            <C>               <C>     
Fourth quarter                                                                   $ 16.375         $  7.563
Third quarter                                                                       9.875            6.50
Second quarter                                                                     10.625            8.031
First quarter                                                                      12.375            8.00
</TABLE>

HOLDERS OF RECORD

       As of December 1, 1998, there were approximately 13,900 beneficial
holders of the Company's common stock.

DIVIDENDS

       The Company has never declared or paid cash dividends. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends on its capital stock in the foreseeable
future. The Company is subject to legal restrictions related to distribution of
earnings of its Taiwan subsidiary. See Note 10 of Notes to Consolidated
Financial Statements.

RECENT SALES OF UNREGISTERED SECURITIES

       On December 3, 1997, in connection with the merger of Nexcom with and
into the Company, the Company issued an aggregate of 772,693 shares of its
Common Stock to the Nexcom shareholders. The shares were issued pursuant to
Section 4(2) and Rule 506 of Regulation D promulgated under the Securities Act
of 1933, as amended.



                                       10
<PAGE>   13

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                       Fiscal Year Ended September 30,
                                                   1998             1997              1996            1995            1994
                                                 ---------        ---------        ---------        ---------       ---------
                                                                    (in thousands, except per share data)
<S>                                              <C>              <C>              <C>              <C>             <C>      
Net sales                                        $ 131,132        $ 108,261        $ 132,039        $ 123,201       $  60,836
Gross margin                                         4,338           32,156           31,855           62,252          20,553
Operating income (loss)                            (53,053)         (10,776)          (4,683)          34,476           4,994
Net income (loss)                                  (43,933)          (7,686)           1,015           29,653           4,612
Basic income (loss) per share(1)                     (2.32)           (0.43)            0.06             1.98            0.37
Diluted income (loss) per share(1)                   (2.32)           (0.43)            0.06             1.80            0.34

Working capital                                     32,549           75,544          107,929          120,839          16,648
Total assets                                       202,168          195,596          178,039          204,441          33,243
Total long-term obligations, notes payable,
  and current portion of long-term obligations      33,791           20,101           14,534           33,888           1,526
Stockholders' equity                                90,920          134,567          142,435          139,909          21,187
Dividends paid                                          --               --               --               --              --
</TABLE>


----------

(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the basis used to calculate net income (loss) per share. Pro forma income per
share is presented for fiscal 1994.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

           The Company's financial results for fiscal 1998 are presented on a
consolidated basis and include the results of the operations which were
transferred to NexFlash and as well as those of ISSI-Taiwan. In fiscal 1999, the
Company's financial results will not consolidate the results of NexFlash, as the
Company's ownership of NexFlash is less than 50%. The Company will account for
NexFlash on the equity basis and will include in its financial statements its
percentage share of NexFlash's financial results. This change is expected to
have a minimal effect on the Company's consolidated revenue and will result in a
decrease in the Company's consolidated research and development expenses. The
Company expects to sell up to an additional 18% of its interest in ISSI-Taiwan
in fiscal 1999 and, as a result, the Company's ownership interest in ISSI-Taiwan
will be less than 50%. At such time, the Company's financial statements will not
consolidate the results of ISSI-Taiwan but will account for ISSI-Taiwan on the
equity basis and will include its percentage share of ISSI-Taiwan's financial
results. At such time as the Company's consolidated results no longer include
ISSI-Taiwan, there will be a significant decline in the Company's consolidated
revenue, a decline in operating expenses, and there may be an increase in the
Company's effective tax rate. See Note 13 of Notes to Consolidated Financial
Statements.

FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1997

           Net Sales. Net sales consist principally of total product sales less
estimated sales returns. Net sales increased by 21% to $131.1 million in fiscal
1998 from $108.3 million in fiscal 1997. The increase in sales was principally
due to shipments of the Company's newer products, specifically its 64K x 16, 64K
x 32, and 64K x 64 SRAMs and its 256K x 16 DRAM. Additionally, shipments of the
Company's more mature 128K x 8 SRAM product increased, more than offsetting the
lower average selling price for such product and shipments of the more mature
32K x32 SRAM increased while its average selling price increased. Shipments of
certain of the Company's NVM products, principally its EPROMs and EEPROMs,
declined significantly in fiscal 1998 compared to fiscal 1997. The Company
anticipates that the average selling prices of substantially all of its existing
products will continue to decline although the rate of decline may fluctuate for
certain products. There can be no assurance that such declines will be offset by
higher volumes or by higher prices on newer products. See "Certain Factors -
Declines in Average Selling Prices". Sales to 3Com/U.S. Robotics accounted for
approximately 19% of total net 



                                       11
<PAGE>   14

sales for both fiscal 1998 and fiscal 1997. As sales to this customer are
executed pursuant to purchase orders and no purchasing contract exists, the
customer can cease doing business with the Company at any time.

       Gross Profit. The Company's cost of sales includes die cost from the
wafers acquired from foundries, subcontracted package and assembly costs, costs
associated with in-house product testing, quality assurance and import duties.
Gross profit decreased 87% to $4.3 million in fiscal 1998 from $32.2 million in
fiscal 1997. As a percentage of net sales, gross profit decreased to 3.3% in
fiscal 1998 from 29.7% in fiscal 1997. In fiscal 1998, the Company recorded
inventory write-downs of $23.0 million, including $9.6 million in the September
quarter. The inventory write-downs were predominately for lower of cost or
market issues on certain of the Company's products, primarily SRAMs. The
September 1998 quarter included a $2.9 million write-down of certain Flash
inventories due to obsolescence resulting from the decision to spin off the
Company's Flash product business to form NexFlash. In addition, in the December
1997 quarter, the Company wrote-off $0.8 million worth of a specific DRAM
product, for which the Company's six month forecast showed minimal demand at
December 31, 1997 and for which the Company has had minimal sales to date. It is
the Company's practice to write-down to zero carrying value inventory on hand in
excess of six months estimated sales volumes to cover estimated exposures unless
adjustments are made to the forecast based on management's judgments for newer
products, end of life products or planned inventory increases. Management's
judgments take into account the product life cycles which can range from 6 to 24
months, the maturity of the product as to whether it is newly introduced or is
approaching its end of life, the impact of competitor announcements and product
introductions on the Company's products and purchasing opportunities due to
excess wafer capacity. The Company believes that six months is an appropriate
period for sales forecasts and inventory exposure calculations because it is
difficult to accurately forecast for a specific product beyond this time frame
due to potential introduction of products by competitors, technology
obsolescence or fluctuations in demand. The policy has resulted in inventory
write-downs of approximately $5.4 million, $0, and $15 million for fiscal year
1998, 1997 and 1996, respectively, and recoveries of written-down inventory of
approximately $0, $13.9 million, and $0.3 million in fiscal 1998, 1997 and 1996,
respectively. Excluding the inventory write-downs of $23.0 million for fiscal
1998, the decrease in gross profit dollars was primarily the result of a
continuing decline in the average selling prices of the Company's products
without a commensurate decline in product cost, particularly in the second half
of the fiscal year. The Company believes that the average selling price of its
products will continue to decline and, unless the Company is able to reduce its
cost per unit to the extent necessary to offset such declines, the decline in
average selling prices will result in a material decline in the Company's gross
margin. Although the Company has product cost reduction programs in place for
certain products that involve efforts to reduce internal costs and supplier
costs, there can be no assurance that product costs will be reduced or that such
reductions will be sufficient to offset the expected declines in average selling
prices. The Company does not believe that such cost reduction efforts are likely
to have a material adverse impact on the quality of its products or the level of
service provided by the Company.

           Research and Development. Research and development expenses increased
by 22% to $31.9 million in fiscal 1998 from $26.2 million in fiscal 1997. As a
percentage of net sales, research and development expenses increased to 24.3% in
fiscal 1998 from 24.2% in fiscal 1997. The increase in absolute dollars was
primarily the result of an increase in engineering personnel and payroll related
expenses and increased expenses related to the development of new products.
During fiscal 1998, the Company's development efforts principally focused on
wider width SRAMs such as the 64K x 64, 64K x 32, 64K x 36 and 128K x 64
configurations, specialty EDO DRAMs, specialty DSP support SRAMs, serial Flash
and other memory related devices. The Company anticipates that its research and
development expenses will decline in fiscal 1999 primarily as a result of its
transfer of Flash development efforts to NexFlash, as well as its expense
reduction efforts, which include a reduction in force, salary cuts, and
limitations on discretionary spending, although such expenses may fluctuate as a
percentage of net sales.

           Selling, General and Administrative. Selling, general and
administrative expenses increased by 10% to $18.4 million in fiscal 1998 from
$16.8 million in fiscal 1997. As a percentage of net sales, selling, general and
administrative expenses decreased to 14.0% in fiscal 1998, from 15.5% in fiscal
1997. The increase in absolute dollars was primarily the result of increased
payroll related expenses from the addition of marketing and sales personnel and
increased selling commissions associated with higher revenues partially offset
by decreases in bad debt expenses and legal expenses associated with antidumping
proceedings. The Company expects its selling, general and administrative
expenses will decline in fiscal 1999 as a result of its expense reduction
efforts, although such expenses may fluctuate as a percentage of net sales.



                                       12
<PAGE>   15

           In-process Technology. In December 1997, the Company completed its
acquisition of Nexcom in exchange for the issuance of 772,693 shares of Common
Stock, $0.5 million in cash, and the assumption of $1.2 million of net
liabilities (total consideration of approximately $8.5 million). In addition,
the Company incurred approximately $400,000 in other costs related to this
transaction. The transaction was accounted for as a purchase and resulted in an
in-process technology charge of $7.1 million in the Company's December 31, 1997
quarter.

           Gain on sale of investment. In June 1998, the Company sold
approximately 46% of ISSI-Taiwan to a group of private investors. The price was
privately negotiated between the parties. Cash proceeds from the transaction
totaled $35.5 million net of withholding and transaction taxes. The transaction
resulted in a pre-tax gain of $17.2 million which is recorded in the Company's
June 30, 1998 quarter.

           Interest and other income (loss), Net. Other income (loss), net
decreased to $(3.5) million in fiscal 1998 from $1.9 million in fiscal 1997,
primarily due to exchange losses as well as decreased interest earnings as a
result of lower cash and short-term investment balances and increased interest
expense as a result of increased short-term and long-term borrowings.

           Provision (benefit) for Income Taxes. The income tax provision for
fiscal 1998 is comprised mainly of foreign withholding taxes related to the sale
of ISSI-Taiwan stock and a reversal of previously recorded federal deferred tax
assets which management has now determined should be subject to a valuation
allowance based on historical and future earnings trends. The income tax benefit
for fiscal 1997 was the result of losses which were carried back for refunds of
prior federal taxes paid and Taiwan tax credits offset by a partial valuation
allowance set up for U.S. deferred tax assets.

           As a result of its Hsinchu Science-Based Industrial Park in Taiwan,
ISSI-Taiwan has received a significant tax exemption for taxable income
beginning October 1, 1992. This tax exemption is extended each time ISSI-Taiwan
expands its capital assets and uses the capital to purchase qualified machinery.
The precise amount of the exemption is calculated annually based upon the extent
of ISSI-Taiwan's net operating taxable income and measured by certain factors,
including use of qualified manufacturing equipment, self-manufacturing costs and
qualified sales revenue. The portion of ISSI-Taiwan's taxable income which is
not subject to exemption is taxed at a flat 20% tax rate. There can be no
assurances that the Company's current tax status in Taiwan will not change in
the future due to changes in the regulatory environment, the inability to
qualify for exempt status or other factors.

           Under Statement of Financial Accounting Standards No. 109 (FAS 109),
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Management has established a valuation allowance
covering the U.S. portion of the gross deferred tax assets based on management's
belief that the realization of the U.S. deferred tax assets is not realizable on
a more likely than not basis. Management has determined, based on ISSI-Taiwan's
history of prior operating earnings and its expectation of future taxable
income, that a partial valuation allowance for ISSI-Taiwan's deferred tax assets
should be provided. Although realization of the ISSI-Taiwan deferred tax assets
is not assured, management believes that it is more likely than not that the
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.

Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30,
1996

       Net Sales. Net sales decreased by 18% to $108.3 million in fiscal 1997
from $132.0 million in fiscal 1996. The decrease in sales was principally due to
significant deterioration in the average selling prices of the Company's SRAM
and NVM products. The decreased revenue resulting from lower average selling
prices was partially offset by increased unit shipments of SRAM products,
specifically the Company's 256K, 512K, 1024K products, cache module products,
and NVM products. Sales to one customer, 3Com/U.S. Robotics, accounted for
approximately 19% and 22% of total net sales for fiscal 1997 and fiscal 1996,
respectively.

       Gross Profit. Gross profit increased 1% to $32.2 million in fiscal 1997
from $31.9 million in fiscal 1996. As a percentage of net sales, gross profit
increased to 29.7% in fiscal 1997, from 24.1% in fiscal 1996. Fiscal 1996
included a $15.0 million write down of inventory during the June quarter related
to various SRAM products (primarily 8Kx8, 32Kx8 and 128Kx8) as well as some NVM
products (EPROM and EEPROM) that the Company anticipated as being non-salable
based on its six month sales forecast. Excluding the $15.0 million inventory
write-



                                       13
<PAGE>   16

down, gross profit was $46.9 million or 35.5% of net sales in fiscal 1996.
Excluding the inventory write-down in the 1996 period, the decrease in the
fiscal 1997 gross profit was primarily the result of significantly lower average
selling prices for the Company's SRAM and NVM products in fiscal 1997 compared
to fiscal 1996. Although product unit costs were lower in fiscal 1997 compared
to fiscal 1996, such reductions did not offset the declines in average selling
prices, resulting in lower gross margins. Gross profit for fiscal 1997 reflects
a $13.9 million benefit related to inventory sold during 1997 that had been
written-down in June 1996. Gross margin would have been $18.2 million or 16.8 %
without the benefit from the sale of the previously written down product. Late
in the first quarter of fiscal 1997, the Company began to realize that, due to
changes in industry conditions, its estimate of the June 30, 1996 sales forecast
and inventory write-down may not have been accurate. Sales continued to decline
in the September 1996 quarter, but thereafter the Company experienced sequential
quarterly revenue growth throughout fiscal 1997 moving from $23.1 million for
the September 1996 quarter to $32.3 million for the September 1997 quarter. The
sales forecast used to estimate the June 1996 quarter write-down changed on a
quarterly basis throughout fiscal 1997 as demand for the written-down products
strengthened or was extended. This change was not attributable to any single
event, but rather an overall strengthening of demand in the industry. Revenues
for the product categories that were written down in June 1996, totaled
approximately $80.3 million in fiscal 1997 compared to approximately $118.7
million in fiscal 1996. The Company continued to sell these product categories
throughout fiscal 1997, but at prices that declined significantly during the
quarters.

       Research and Development. Research and development expenses increased by
23% to $26.2 million in fiscal 1997 from $21.4 million in fiscal 1996. As a
percentage of net sales, research and development expenses increased to 24.2% in
fiscal 1997 from 16.2% in fiscal 1996. These increases were primarily the result
of an increase in engineering personnel, increased payroll related expenses and
increased expenses related to the development of new products and, to a lesser
extent, the write-off of obsolete engineering equipment and software. During
fiscal 1997, the Company's development efforts principally focused on wider bus
width SRAMs such as the 64K x 32, 64K x 16 and 32K x 16 configurations, 2
megabit Flash memory, geometry reductions for its memory products, EPROMs, and
other memory related devices. In this regard, the Company developed its initial
DRAM devices, specialty high speed 4 megabit and 2 megabit DRAMs during fiscal
1997.

       Selling, General and Administrative. Selling, general and administrative
expenses increased by 10% to $16.8 million in fiscal 1997 from $15.2 million in
fiscal 1996. As a percentage of net sales, selling, general and administrative
expenses increased to 15.5% in fiscal 1997 from 11.5% in fiscal 1996. These
increases were primarily the result of increases in legal expenses associated
with antidumping proceedings and increased payroll related expenses from the
addition of marketing and sales personnel, partially offset by decreased selling
commissions associated with lower revenues.

       Interest and other income, Net. Interest and other income, net decreased
to $1.9 million in fiscal 1997 from $4.5 million in fiscal 1996, primarily due
to decreased net interest earnings as a result of lower cash and short-term
investment balances.

       Benefit for Income Taxes. The Company recorded a tax benefit of $1.1
million for fiscal year 1997 which was primarily attributable to investment tax
credits generated by ISSI-Taiwan during the year ended September 30, 1997. The
Company recorded a tax benefit of $1.2 million for fiscal year 1996 which was
primarily attributable to lower than expected profit before income taxes and tax
benefits relating to tax-exempt interest income and the dividends deduction. In
addition, ISSI-Taiwan generated significant investment tax credits during the
year ended September 30, 1996.

LIQUIDITY AND CAPITAL RESOURCES

           As of September 30, 1998, the Company's principal sources of
liquidity included cash, cash equivalents, restricted cash and short-term
investments of approximately $35.9 million, of which approximately $5.0 million
was held by ISSI-Taiwan. Approximately $0.3 million of the cash held by the
Company is restricted as of September 30, 1998 for purposes of securing
available short-term lines of credit and letters of credit. During fiscal 1998,
operating activities used cash of approximately $34.5 million. Cash used by
operations was primarily due to net loss adjusted for the gain on the partial
sale of ISSI-Taiwan, depreciation, in-process technology charge and other
non-cash items and increases in inventory partially offset by increases in
accounts payable and decreases in other assets.



                                       14
<PAGE>   17

           Inventory increased to $46.5 million at September 30, 1998 from $40.7
million at September 30, 1997. The increase in inventory was predominately due
to increases in the Company's newer SRAM products earlier in the year in
anticipation of stronger future demand that did not materialize and increases in
the inventory of wafers purchased by the Company.

           Accounts payable increased to $40.6 million at September 30, 1998
from $23.1 million at September 30, 1997. The increase in accounts payable is
principally related to increases in inventory.

           In fiscal 1998, the Company was provided with $18.1 million from
investing activities compared to $5.6 million in fiscal 1997. The cash provided
from investing activities was primarily the result of $37.6 million from the
partial sale of ISSI-Taiwan and $17.8 million from the sale of
available-for-sale securities offset by $19.2 million used for the acquisition
of fixed assets, $12.5 million invested in WaferTech, and $4.7 million invested
in UICC.

           The Company made capital expenditures of approximately $19.2 million
in fiscal 1998, of which approximately $11.2 million was for the construction of
ISSI-Taiwan's new facility and $8.0 million was for the purchase of test
equipment and design and engineering tools. The Company expects to spend
approximately $7.0 million to purchase capital equipment during the next twelve
months, principally for the purchase of additional test equipment, design and
engineering tools, and computer hardware and software. Additionally, the Company
expects to spend approximately $5.0 million during the next twelve months for
the completion of construction of the ISSI-Taiwan facility. A portion of this
construction cost is expected to be financed through loans. Although
construction is still continuing, ISSI-Taiwan took occupancy of the building in
August 1998.

           In June 1998, the Company sold approximately 46% of ISSI-Taiwan to a
group of private investors. The price was privately negotiated between the
parties. Cash proceeds from the transaction totaled $35.5 million net of
withholding and transaction taxes. The transaction resulted in a pre-tax gain of
$17.2 million which is recorded in the Company's June 30, 1998 quarter. The
Company expects to sell up to an additional 18% of its interest in ISSI-Taiwan
during fiscal 1999.

       In June 1996, the Company entered into a business venture "WaferTech,
LLC" with TSMC, Altera, Analog Devices, and private investors to build a wafer
fabrication facility in Camas, Washington. The Company agreed to invest $31.2
million for a 4% equity interest in the venture and as of September 30, 1998 all
of this amount had been paid. The last scheduled payment to WaferTech by the
Company of $12.5 million was made in November 1997. In December 1998, the
Company agreed to sell approximately 33% of its investment in WaferTech to TSMC
for approximately $10.0 million. The transaction is expected to close in January
1999. Upon completion of the transaction, the Company will have a 2.67% interest
in WaferTech. The Company has also agreed to certain minimum wafer purchase
commitments with its foundry partners in exchange for wafer capacity
commitments. In fiscal 1995, the Company entered into an agreement with TSMC
pursuant to which the Company agreed to acquire specified wafer capacity through
2001. The Company also agreed to make certain annual payments totaling
approximately $19.2 million through 2001 to TSMC for additional capacity above
the annual base capacity. Wafer purchases in any given year are first applied to
the base capacity and then to the Company's $19.2 million obligation. As a
result, the $19.2 million may be subject to forfeiture if the Company does not
purchase the base capacity and additional capacity for which it has contracted.
The Company also has minimum purchase obligations to TSMC related to WaferTech
LLC. The Company is obligated to purchase from WaferTech or TSMC a minimum of
3.4% of WaferTech's installed capacity. Initial wafer outs occurred in the
second half of calendar 1998. Additionally, in fiscal 1995, the Company entered
into a business venture "United Integrated Circuits Corp" ("UICC") with UMC and
other investors to build a wafer fabrication facility in Hsinchu, Taiwan. The
Company has invested approximately $16.5 million (subject to fluctuations in the
New Taiwanese Dollar) for a 4% equity interest in the venture of which UMC
retains 55% ownership. The final payment of approximately $4.7 million was made
to UICC in December 1997. The UICC facility was severely damaged by fire in
October 1997. It is the Company's understanding that the damage was covered by
insurance. UICC has undertaken a clean up of the facility but reconstruction has
not commenced as an alternative site is being evaluated. A decision as to
whether to build on the existing site or the alternative site has not yet been
made. The Company believes that its investment of $16.5 million is recoverable.

           The Company was provided $23.9 million from financing activities
during fiscal 1998, as compared to $9.2 million in fiscal 1997, of which $15.9
million was for net borrowings under short-term and long-term lines of credit,
$4.8 million resulted from the decrease in restricted cash and $3.1 million was
for proceeds from the issuance of common stock under stock option and stock
purchase plans. The Company has $23.5 million available through a



                                       15
<PAGE>   18

number of short-term lines of credit with various financial institutions in
Taiwan. As of September 30, 1998, the Company had outstanding borrowings of
approximately $18.2 million under these short-term lines of credit.

           ISSI-Taiwan has a number of long-term lines of credit with various
financial institutions in Taiwan to finance the purchase of machinery, equipment
and building construction in Taiwan. Total obligations related to these
borrowings as of September 30, 1998 were $15.5 million, of which $3.4 million is
included in the current portion of long-term obligations. These obligations bear
interest at rates from 6.82% to 8.82% and are payable in quarterly installments
through 2004. As of September 30, 1998, the Company had available long-term
lines of credit of approximately $7.0 million of which approximately $2.8
million is for the construction financing of the Company's new facility in the
Hsinchu Science-Based Industrial Park.

           On April 22, 1998, the U.S. Department of Commerce ("DOC") published
an amended antidumping duty order on imports of SRAMs from Taiwan from where the
Company currently imports a majority of its SRAMs. As a consequence of this
antidumping duty order, the Company is required to post a cash deposit on
imports of Taiwan fabricated SRAM wafers or devices, at the ad valorem rate of
7.56%. The cash deposits subsequently could be returned to the Company or,
alternatively, the Company could forfeit amounts deposited and owe duties and
interest in addition to the amounts deposited, depending on whether the DOC
conducts an administrative review of imports entered after the imposition of the
antidumping order, and if so, on the results of the DOC review. The decision on
whether to conduct a review will be made in 1999, and the results of the review
would be issued in the year 2000.

           The Company has retained legal counsel to defend and assist in its
interests in the antidumping proceedings. In addition, certain aspects of the
antidumping determination are being challenged in federal court proceedings by
some of the respondents to the investigation, and these proceedings could result
in the termination of this antidumping case. Duties calculated and assessed by
the government could have a material adverse affect on the Company's gross
margins and profits. There can be no assurance that any reviews or proceedings
will mitigate or eliminate antidumping duties.

           On October 22, 1998, Micron Technology filed an antidumping petition
against DRAMs fabricated in Taiwan. Currently, the Company's DRAM products are
fabricated in Taiwan. The case is expected to take from 12 to 18 months to
complete. If the petition is upheld, the Company could face DRAM duties, unless
it is able to secure DRAM from outside of Taiwan. Currently, DRAM accounts for
less than 10% of the Company's revenue.

           The Company believes that its existing funds together with available
financing will satisfy the Company's anticipated working capital and other cash
requirements through the next 12 months. The Company may evaluate actions to
further increase its cash position such as bank borrowings, sales of additional
shares of ISSI-Taiwan, the disposition of certain assets, equity financing, and
debt financing.

           The Company, from time to time, evaluates potential acquisitions and
equity investments complementary to its memory expertise and market strategy. To
the extent the Company pursues such transactions, any such transactions could
require the Company to seek additional equity or debt financing to fund such
activities. There can be no assurance that any such additional financing could
be obtained on terms acceptable to the Company, if at all.


CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS OR FUTURE OPERATING
RESULTS

DEPENDENCE ON SRAM PRODUCTS; DECLINE IN AVERAGE SELLING PRICES FOR SRAM PRODUCTS

           A substantial majority of the Company's net sales are derived from
the sale of SRAM products, which are subject to unit volume fluctuations and
declines in average selling prices. For example, in the June 1998 quarter, the
Company's net sales decreased by 38% to $25.0 million from $40.7 million in the
March 1998 quarter, principally due to a decrease in unit shipments of the
Company's SRAM products. In fiscal 1997, the Company's net sales decreased by
18% to $108.3 million from $132.0 million in fiscal 1996. This decrease in sales
was principally due to significant deterioration in the average selling prices
of the Company's SRAM and NVM products. The Company anticipates that the average
selling prices of its existing products will continue to decline over time,
although the rate of decline may fluctuate for certain products. There can be no
assurance that such declines will be offset by higher volumes or by higher
prices on newer products.



                                       16
<PAGE>   19

QUARTERLY FLUCTUATIONS IN OPERATING RESULTS

           The Company's future quarterly and annual operating results are
subject to fluctuations due to a wide variety of factors, many of which are
outside of its control, including declines in average selling prices of the
Company's products, oversupply of memory products in the market, failure to
introduce new products and to implement technologies on a timely basis, the
timing and announcement of new product introductions by the Company and its
competitors, market acceptance of the Company's and its customers' products, the
failure to anticipate changing customer product requirements, fluctuations in
manufacturing yields, disruption in delivery and order fulfillment, and
disruption in the supply of wafers or assembly services. Other factors include
changes in product mix, seasonal fluctuations in customer demand for the
Company's products, the timing of significant orders, increased expenses
associated with new product introductions or process changes, the ability of
customers to make payments to the Company, increases in material costs,
increases in antidumping duties, increases in costs associated with the
expansion of sales channels, increases in general and administrative expenses,
and certain production and other risks associated with using independent
manufacturers. In this regard, in the June 1998 quarter, the Company's net sales
decreased by 38% to $25.0 million from $40.7 million in the March 1998 quarter
principally due to a decrease in unit shipments of the Company's SRAM products.
In addition, in fiscal 1997, the Company's net sales decreased by 18% to $108.3
million from $132.0 million in fiscal 1996. This decrease in sales was
principally due to significant deterioration in the average selling prices of
the Company's SRAM and NVM products. In fiscal 1998, approximately 43% of the
Company's net sales were attributable to customers located in the United States,
18% was attributable to customers located in Europe and 39% was attributable to
customers located in Asia. In fiscal 1997, approximately 45% of the Company's
net sales were attributable to customers located in the United States, 13% was
attributable to customers located in Europe and 42% was attributable to
customers located in Asia. In fiscal 1998 and 1997, international sales (sales
by ISSI-Taiwan and export sales by ISSI-U.S.) comprised approximately 57% and
55% of the Company's net sales, respectively. Accordingly, the Company's future
operating results will also depend in part on general economic conditions in
Asia, the United States and its other markets. In this regard, since late 1997
many Asian countries, including Korea, Japan and Thailand, have experienced
significant economic downturns and significant declines in the value of their
currencies relative to the U.S. dollar. The Company is unable to predict what
future effect, if any, these factors will have on its ability to maintain or
increase its sales in these markets. In addition, there can be no assurance that
the markets for the Company's products, which are highly cyclical, will continue
to grow.


DECLINES IN AVERAGE SELLING PRICES

           Competitive pricing pressures due to an industry-wide oversupply of
wafer capacity resulted in significant price decreases for the Company's
products during 1996, 1997 and 1998. Historically, average selling prices for
semiconductor memory products have declined and the Company expects that average
selling prices will decline in the future. Accordingly, the Company's ability to
maintain or increase revenues will be highly dependent upon its ability to
increase unit sales volume of existing products and introduce and sell new
products which compensate for the anticipated declines in the average selling
prices of its existing products. Declining average selling prices will also
adversely affect the Company's gross margins and profits unless the Company is
able to introduce new products with higher margins or reduce its cost per unit
to offset declines in average selling prices. There can be no assurance that the
Company will be able to increase unit sales volumes, introduce and sell new
products or reduce its cost per unit. In this regard, the Company has a cost
reduction program in place, which involves efforts to reduce internal costs and
supplier costs, in an effort to reduce its cost per unit for certain products.
The Company does not believe that such cost reduction efforts are likely to have
a material adverse impact on the quality of its products or the level of service
provided by the Company.

RISK OF INVENTORY WRITE-DOWNS

           Shifts in industry-wide capacity from shortages to oversupply or from
oversupply to shortages may result in significant fluctuations in the Company's
quarterly or annual operating results. The semiconductor industry is highly
cyclical and is subject to significant downturns resulting from excess capacity,
overproduction, reduced demand or technological obsolescence. These factors can
result in a decline in average selling prices and the stated value of inventory.
In fiscal 1998, the Company recorded inventory write-downs of $23.0 million,
including $9.6 million in the September quarter. The inventory write-downs were
predominately for lower of cost or market issues on certain of the Company's
products, primarily SRAMs. The September 1998 quarter included a $2.9 million
write-down of certain of the Company's Flash inventories due to obsolescence
resulting from the Company's 



                                       17
<PAGE>   20

decision to spin off the Flash product business to form NexFlash. In addition,
in the December 1997 quarter, the Company wrote-off $0.8 million worth of a
specific DRAM product, for which the Company's six month forecast showed minimal
demand at December 31, 1997 and for which the Company has had minimal sales to
date. It is the Company's practice to write-down to zero carrying value
inventory on hand in excess of six months estimated sales volumes to cover
estimated exposures unless adjustments are made to the forecast based on
management's judgments for newer products, end of life products or planned
inventory increases. Management's judgments take into account the product life
cycles which can range from 6 to 24 months, the maturity of the product as to
whether it is newly introduced or is approaching its end of life, the impact of
competitor announcements and product introductions on the Company's products and
purchasing opportunities due to excess wafer capacity. The Company believes that
six months is an appropriate period because it is difficult to accurately
forecast for a specific product beyond this time frame due to potential
introduction of products by competitors, technology obsolescence or fluctuations
in demand. In this regard, in the June 1996 quarter, the Company recorded a $15
million write-down for various SRAM and NVM products that the Company's forecast
indicated would not be sold in the next six months. The Company did not expect
to sell the excess inventory at the time because the volume and price declines
from the December 1995 quarter to the June 1996 quarter resulted in a decrease
in revenues of 38%. During this period, market conditions were extremely
uncertain. Furthermore, during the fourth fiscal quarter of 1996 the Company
experienced a continued decline in revenue of 16% from the June 1996 quarter.
While the Company continued to focus on the selling of this product, sales
reached a bottom in its decline in the September 1996 quarter and stayed
relatively flat in the December 1996 quarter. Subsequently, as market conditions
improved in the latter part of the December 1996 quarter, the Company was able
to sell certain of these products. As a result of improving market conditions
during fiscal 1997, the Company was able to sell $13.9 million of the
written-off product. However, the Company considers such sales unusual and there
can be no assurance that in the future written-off inventory can be sold.
Historically, the Company has consistently applied this practice in valuing
inventory and, until the events that transpired in the first through third
quarters of fiscal 1996, had never recorded material write-downs or recoveries.
The Company believes that based on the factors noted above, its six month
write-off policy is still appropriate as a method to identify and estimate
inventory exposure. There can be no assurance that in the future additional
inventory write-downs will not occur.

PRODUCT CONCENTRATION AND DEPENDENCE ON PERSONAL COMPUTER INDUSTRY

           A majority of the Company's products are incorporated into products
such as modems, networking equipment, disk drives and PC cache. The PC and PC
peripherals industry has from time to time experienced cyclical, depressed
business conditions, often in connection with, or in anticipation of, a decline
in general economic conditions. Such industry downturns have resulted in reduced
product demand and declining average selling prices. The Company's business and
operating results would be materially and adversely affected by any future
downturns in the peripherals industry or in PCs.

CUSTOMER CONCENTRATION

           The Company's sales are concentrated within a limited customer base.
In both fiscal 1998 and fiscal 1997, one customer, 3COM, accounted for
approximately 19% of net sales. As sales to this customer are executed pursuant
to purchase orders and no purchasing contract exists, the customer can cease
doing business with the Company at any time. The Company expects a significant
portion of its future sales to remain concentrated within a limited number of
strategic customers. There can be no assurance that the Company will be able to
retain its strategic customers or that such customers will not otherwise cancel
or reschedule orders, or in the event of canceled orders, that such orders will
be replaced by other sales. In addition, sales to any particular customer may
fluctuate significantly from quarter to quarter. The occurrence of any such
events could have a material adverse effect on the Company's business and
operating results.

DEPENDENCE ON INDEPENDENT WAFER FOUNDRIES

           The Company has combined its fabless manufacturing strategy with
technology partnerships and equity investments. This hybrid approach, which the
Company calls "Fab-Lite(TM)", has provided advanced process technology and a
committed wafer supply. To date, the Company's principal manufacturing
relationship has been with TSMC, from which the Company has obtained a
substantial majority of its wafers. The Company also receives wafers from
Chartered Semiconductor and UMC. Each of the Company's wafer suppliers also
fabricates for other integrated circuit companies, including certain of the
Company's competitors. Although the Company has written commitments specifying
wafer capacities from its suppliers, if these suppliers experience manufacturing
failures or 



                                       18
<PAGE>   21

yield shortfalls, choose to prioritize capacity for other use or reduce or
eliminate deliveries to the Company there can be no assurance that the Company
could enforce fulfillment of the delivery commitments. There can be no assurance
that the Company would be able to qualify additional manufacturing sources for
existing or new products in a timely manner or that such additional
manufacturing sources would agree to deliver an adequate supply of wafers. If
the Company were unable to obtain an adequate supply of wafers from its current
or any alternative sources in a timely manner, its business and operating
results would be materially and adversely affected.

           The Company has certain minimum wafer purchase commitments with its
foundry partners in exchange for wafer capacity commitments. The Company has
agreed to make certain annual purchases totaling, in aggregate, approximately
$19.2 million through 2001 from TSMC for additional capacity above the annual
base capacity. Wafer purchases in any given year are first applied to the base
capacity and then to the Company's $19.2 million obligation. As a result, the
$19.2 million may be subject to forfeiture if the Company does not purchase the
base capacity and additional capacity for which it has contracted. The Company
has minimum purchase obligations to TSMC related to WaferTech LLC, a business
venture in which the Company is an investor. The Company is obligated to
purchase from WaferTech or TSMC a minimum of 3.4% of WaferTech's installed
capacity. Although the Company has rights to re-schedule or assign capacity to
another party, there can be no assurance that such re-schedule or assignment
would be successfully accomplished. Should the Company fail to re-schedule or
assign unneeded capacity, the Company will be required to make payments for the
unused capacity and its business and operating results would be materially and
adversely affected.

INTERNATIONAL OPERATIONS

           The Company is subject to the risks of conducting business
internationally, including economic conditions in Asia, particularly Taiwan,
changes in trade policy and regulatory requirements, tariffs and other trade
barriers and restrictions, the burdens of complying with foreign laws, and
possibly, political instability. The Company anticipates that sales to
international customers will continue to represent a significant percentage of
net sales. In addition, substantially all of the Company's foundries and
assembly and test operations are located in Asia. The Company transacts business
predominately in U.S. and New Taiwan ("NT") dollars. Such transactions expose
the Company to the risk of exchange rate fluctuations. The Company monitors its
exposure to foreign currency fluctuations, and has from time to time taken
action to hedge against such exposure, but has not to date adopted any formal
hedging strategy. The Company's business and results of operations have been
negatively impacted by exchange rate fluctuations in the past and there can be
no assurance that exchange rate fluctuations will not materially and adversely
affect its business and operating results in the future.

COMPETITION

           The semiconductor memory market is intensely competitive and has been
characterized by an oversupply of product, price erosion, rapid technological
change, short product life cycles, cyclical market patterns and heightened
foreign and domestic competition. The ability of the Company to compete
successfully in the high performance memory market depends on factors both
within and outside of its control, including imbalances in supply and demand,
product pricing, the rate at which OEM customers incorporate the Company's
products into their systems, access to advance process technologies at
competitive prices, product functionality, performance, and reliability,
successful and timely product development, wafer supply, wafer costs,
achievement of acceptable yields of functional die, the gain or loss of
significant customers, the nature of its competitors and general economic
conditions. There can be no assurance that the Company will be able to compete
successfully in the future as to any of these factors. The failure of the
Company to compete successfully in these or other areas could materially and
adversely affect the Company's business and operating results. In addition, the
Company is vulnerable to technology advances utilized by competitors to
manufacture higher performance or lower cost products.

CLAIMS REGARDING INTELLECTUAL PROPERTY

           In the semiconductor industry it is typical for companies to receive
notices from time to time alleging infringement of patents or other intellectual
property rights of others. The Company has been, and from time-to-time expects
to be, notified of claims that it may be infringing patents, maskwork rights or
copyrights owned by third parties. Although none of these companies have pursued
a claim against the Company, there can be no assurance that other companies will
not in the future pursue claims against the Company with respect to the alleged
infringement of patents, maskwork rights, copyrights or other intellectual
property owned by third parties. If it appears necessary or desirable, the
Company may seek licenses under patents that it is alleged to be infringing.



                                       19
<PAGE>   22

Although patent holders commonly offer such licenses, there is no assurance that
any licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license under a key patent or
intellectual property right from a third party for technology used by the
Company could cause the Company to incur substantial liabilities and to suspend
the manufacture of the products utilizing the invention or to attempt to develop
non-infringing products, any of which could materially and adversely affect the
Company's business and operating results.

RISK OF INCREASED TAXES

           The Company's tax rate could fluctuate for a number of reasons. For
example, if the proportions of taxable income shifted such that a greater
proportion of taxable income is earned by U.S. operations, the Company's
effective tax rate may increase. It is possible that the Taiwan tax exemption
applicable to the earnings of ISSI-Taiwan could be modified by changes in law or
otherwise reduced. In addition, the Company's taxes would increase if all or a
portion of the earnings of ISSI-Taiwan were to become subject to U.S. tax as the
result of actual dividends or through U.S. rules for taxing controlled foreign
corporations. Further, if profits of ISSI-Taiwan are distributed to the Company
as dividends they become subject to Taiwan withholding tax as well as U.S. tax
(with an offset for underlying Taiwan taxes paid) and the tax rate would
increase.

           ISSI-Taiwan is a controlled foreign corporation ("CFC") for U.S.
income tax purposes. Under U.S. rules for taxing CFCs, all or a portion of the
earnings of ISSI-Taiwan may become subject to U.S. tax as inclusions in the U.S.
taxable income of the Company (with a credit for foreign taxes paid by
ISSI-Taiwan) if one or more of a number of events occur. Such events include,
but are not limited to, ISSI-Taiwan lending funds to the Company or otherwise
investing in certain proscribed assets and ISSI-Taiwan engaging in various types
of transactions defined in the Subpart F provisions of the U.S. Internal Revenue
Code. The Company believes that its existing plans will minimize the impact of
the CFC rules for the immediate future, subject to such changes in U.S. tax laws
as may occur. However, over time the CFC rules may cause the Company's tax rate
to increase.

YEAR 2000 ISSUES

           The Company is aware of the issues associated with computer systems
as the Year 2000 approaches. The Year 2000 issues are the result of common
computer programming techniques that result in systems that do not function
properly when manipulating dates later than December 31, 1999. The problem may
affect internal information technology (IT) systems used by the Company for
product design, product test, accounting, distribution and planning. The problem
may also affect non-IT systems such as security systems, communication equipment
and other equipment.

           The Company has done an initial assessment of its critical IT systems
and has identified at least one area (accounting software) that is not Year 2000
compliant. The Company is currently evaluating alternative software packages and
intends to have implementation completed by October 1999. However, there can be
no assurance that there will not be a delay in the implementation of such
systems. It is estimated that the cost of implementing the new software will
range between $0.1 million to $0.5 million. With respect to critical non-IT
systems, the Company has assessed the compliance of these systems and believes
that these systems are Year 2000 compliant. There can be no assurance that the
Company has successfully identified all its internal Year 2000 issues. The
failure to identify and address internal Year 2000 issues in a timely fashion
could have a material adverse affect on the Company's business and results of
operations.

           The Company could possibly be adversely impacted by Year 2000 issues
faced by major suppliers, subcontractors, and customers. The Company is in the
process of determining the potential impact on its operations as a result of the
Year 2000 readiness of these third parties. Their failure to address Year 2000
issues could have an impact on the Company's operations and financial results.
The extent of this impact, if any, is not known at this time.

           The above discussion regarding costs, risks and estimated completion
dates for the Year 2000 is based on the Company's best estimates given
information that is currently available, and is subject to change. As the
Company proceeds with this project, it may discover that actual results will
differ materially from these estimates.



                                       20
<PAGE>   23

VOLATILITY OF STOCK PRICE

           The trading price of the Company's Common Stock has been subject to
wide fluctuations in response to quarter-to-quarter variations in operating
results, announcements by the Company or its competitors, increases or decreases
in wafer capacity, general conditions in the semiconductor or computer
industries, governmental regulations, trade laws and import duties, litigation,
new or revised earnings estimates, comments or recommendations issued by
analysts who follow the Company, its competitors or the semiconductor industry
and other events or factors. In addition, stock markets have experienced extreme
price and trading volume volatility in recent years. This volatility has had a
substantial effect on the market prices of securities of many high technology
companies for reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock.



                                       21
<PAGE>   24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial StatementS


<TABLE>
<S>                                                                         <C>
Report of Independent Auditors...............................................23

Financial Statements:
       Consolidated Statements of Operations
             For Fiscal Years Ended September 30, 1998,
             September 30, 1997, and September 30, 1996......................24

       Consolidated Balance Sheets
             As of September 30, 1998, and September 30, 1997................25

       Consolidated Statements of Stockholders' Equity
             For Fiscal Years Ended September 30, 1998,
             September 30, 1997, and September 30, 1996......................26

       Consolidated Statements of Cash Flows
             For Fiscal Years Ended September 30, 1998.......................27
             September 30, 1997, and September 30, 1996

       Notes to Consolidated Financial Statements............................28
</TABLE>



                                       22
<PAGE>   25

                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


The Board of Directors and Stockholders
Integrated Silicon Solution, Inc.

       We have audited the accompanying consolidated balance sheets of
Integrated Silicon Solution, Inc. as of September 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

       We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

       In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Integrated Silicon Solution, Inc. at September 30, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.




                                                  ERNST & YOUNG LLP




San Jose, California
October 23, 1998



                                       23
<PAGE>   26

                        Integrated Silicon Solution, Inc.
                      Consolidated Statements of Operations
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                              Years Ended September 30,
                                                    ---------------------------------------------
                                                      1998              1997              1996
                                                    ---------         ---------         ---------
<S>                                                 <C>               <C>               <C>      
Net Sales                                           $ 131,132         $ 108,261         $ 132,039

Cost of sales (other than item below)                 103,794            76,105            85,184
Inventory write-down                                   23,000                --            15,000
                                                    ---------         ---------         ---------
Total cost of sales                                   126,794            76,105           100,184
                                                    ---------         ---------         ---------
Gross profit                                            4,338            32,156            31,855
                                                    ---------         ---------         ---------

Operating expenses
   Research and development                            31,911            26,179            21,350
   Selling, general and administrative                 18,402            16,753            15,188
    In-process technology charge                        7,078                --                --
                                                    ---------         ---------         ---------
      Total operating expenses                         57,391            42,932            36,538
                                                    ---------         ---------         ---------

Operating loss                                        (53,053)          (10,776)           (4,683)
Interest and other income (expense)                    (1,697)            2,535             4,803
Interest expense                                       (1,795)             (607)             (335)
Gain on sale of investment                             17,168                --                --
                                                    ---------         ---------         ---------
Loss before income taxes and
   minority interest                                  (39,377)           (8,848)             (215)
Provision (benefit) for income taxes                    4,668            (1,144)           (1,158)
                                                    ---------         ---------         ---------

Income (loss) before minority interest                (44,045)           (7,704)              943
Minority interest in net loss of
   consolidated subsidiary                               (112)              (18)              (72)
                                                    ---------         ---------         ---------

Net income (loss)                                   $ (43,933)        $  (7,686)        $   1,015
                                                    =========         =========         =========

Basic income (loss) per share                       $   (2.32)        $   (0.43)        $    0.06
                                                    =========         =========         =========

Shares used in basic per share calculation             18,940            17,748            17,457
                                                    =========         =========         =========

Diluted income (loss) per share                     $   (2.32)        $   (0.43)        $    0.06
                                                    =========         =========         =========

Shares used in diluted per share calculation           18,940            17,748            18,356
                                                    =========         =========         =========
</TABLE>



         See the accompanying notes to consolidated financial statements


                                       24
<PAGE>   27

                        Integrated Silicon Solution, Inc.
                           Consolidated Balance Sheets
                      (In thousands, except per share data)


<TABLE>
<CAPTION>
                                                                              September 30,
                                                                       ---------------------------
                                                                         1998              1997
                                                                       ---------         ---------
<S>                                                                    <C>               <C>      
                                     ASSETS
Current assets:
   Cash and cash equivalents                                           $  27,776         $  22,334
   Restricted cash                                                           333             5,202
   Short-term investments                                                  7,800            25,600
   Accounts receivable, net of allowance for doubtful
       accounts of $1,804 in 1998 and  $2,268 in 1997                     19,069            18,478
   Inventories                                                            46,484            40,730
   Other current assets                                                    4,938             7,472
                                                                       ---------         ---------
Total current assets                                                     106,400           119,816
Property, equipment, and leasehold improvements, net                      44,316            27,693
Construction in progress                                                      --             6,343
Other assets                                                              51,452            41,744
                                                                       ---------         ---------
Total assets                                                           $ 202,168         $ 195,596
                                                                       =========         =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Notes payable                                                       $  18,325         $   6,152
   Accounts payable                                                       40,642            23,138
   Accrued compensation and benefits                                       2,945             3,424
   Accrued expenses                                                        8,036             8,725
   Income tax payable                                                        524               582
   Current portion of long-term obligations                                3,379             2,251
                                                                       ---------         ---------
Total current liabilities                                                 73,851            44,272
Income tax payable - noncurrent                                            4,996             5,059
Long-term obligations                                                     12,087            11,698
Minority interest in consolidated subsidiary                              20,314                --
Commitments and contingencies
Stockholders' equity:
   Preferred stock, $0.0001 par value: Authorized shares -
      5,000 in 1998 and 1997. No shares outstanding                           --                --
   Common stock, $0.0001 par value: Authorized shares -
      70,000 in 1998 and 1997.  Issued and outstanding shares -
      19,417 in 1998 and 17,938 in 1997                                        2                 2
   Additional paid-in capital                                            116,199           106,769
   Retained earnings (accumulated deficit)                               (11,667)           32,266
   Cumulative translation adjustment                                     (13,461)           (4,248)
   Unearned compensation                                                    (153)             (222)
                                                                       ---------         ---------
Total stockholders' equity                                                90,920           134,567
                                                                       ---------         ---------
Total liabilities and stockholders' equity                             $ 202,168         $ 195,596
                                                                       =========         =========
</TABLE>


         See the accompanying notes to consolidated financial statements


                                       25
<PAGE>   28

                        Integrated Silicon Solution, Inc.
                 Consolidated Statements of Stockholders' Equity
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                            Retained                                        Total
                                         Common Stock         Additional     Earnings      Cumulative                       Stock-
                                   -----------------------      Paid-In    (Accumulated   Translation     Unearned         holders'
                                    Shares         Amount       Capital       Deficit)     Adjustment    Compensation       Equity
                                   ---------     ---------    ----------   ------------   -----------    ------------     ---------
<S>                                <C>           <C>          <C>          <C>            <C>            <C>              <C>
Balance at September 30, 1995         17,225     $       2     $ 102,376     $  38,937      $  (1,302)     $    (104)     $ 139,909
   Stock options exercised               253            --           952            --             --             --            952
   Shares issued under stock
     purchase plan                       129            --         1,357            --             --             --          1,357
   Amortization of unearned
     compensation                         --            --            --            --             --             43             43
   Tax benefits from sale of
     common stock
                                          --            --           103            --             --             --            103
   Translation adjustment                 --            --            --            --           (944)            --           (944)
   Net income                             --            --            --         1,015             --             --          1,015
                                   ---------     ---------     ---------     ---------      ---------      ---------      ---------
Balance at September 30, 1996         17,607             2       104,788        39,952         (2,246)           (61)       142,435
   Stock options exercised               197            --           665            --             --             --            665
   Shares issued under stock
     purchase plan                       134            --         1,112            --             --             --          1,112
   Unearned compensation                  --            --           204            --             --           (204)            --
   Amortization of unearned
     compensation                         --            --            --            --             --             43             43
   Translation adjustment                 --            --            --            --         (2,002)            --         (2,002)
   Net loss                               --            --            --        (7,686)            --             --         (7,686)
                                   ---------     ---------     ---------     ---------      ---------      ---------      ---------
Balance at September 30, 1997         17,938             2       106,769        32,266         (4,248)          (222)       134,567
     Stock options exercised             461            --         1,674            --             --             --          1,674
   Shares issued under stock
     purchase plan                       245            --         1,379            --             --             --          1,379
   Amortization of unearned
     compensation                         --            --            --            --             --             69             69
   Shares issued for purchase of
     Nexcom Technology, Inc.             773            --         6,377            --             --             --          6,377
   Translation adjustment                 --            --            --            --         (9,213)            --         (9,213)
   Net loss                               --            --            --       (43,933)            --             --        (43,933)
                                   ---------     ---------     ---------     ---------      ---------      ---------      ---------
Balance at September 30, 1998         19,417     $       2     $ 116,199     $ (11,667)     $ (13,461)     $    (153)     $  90,920
                                   =========     =========     =========     =========      =========      =========      =========
</TABLE>



         See the accompanying notes to consolidated financial statements


                                       26
<PAGE>   29

                        Integrated Silicon Solution, Inc.
                      Consolidated Statements of Cash Flows
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                                Years Ended September 30,
                                                                         ---------------------------------------
                                                                           1998           1997           1996
                                                                         ---------      ---------      ---------
<S>                                                                      <C>            <C>            <C>      
Cash flows from operating activities:
   Net income (loss)                                                     $ (43,933)     $  (7,686)     $   1,015
      Adjustments to reconcile net income to net cash
        used in operating activities:
        Depreciation and amortization                                        9,065         11,408          7,586
        In-process technology charge                                         7,078             --             --
        Gain on partial sale of ISSI-Taiwan                                (17,168)            --             --
        Provision for losses on accounts receivable                             --            675            714
        Net foreign currency transaction (gains) losses                      3,188             17           (311)
        Minority interest in net loss of consolidated subsidiary              (112)           (18)           (72)
        Changes in operating assets and liabilities:
           Accounts receivable                                                (386)        (8,007)         6,581
           Inventories                                                     (13,515)       (19,446)       (11,592)
           Other assets                                                      7,458          4,328         (7,710)
           Accounts payable                                                 16,350         13,939         (6,721)
           Accrued expenses                                                 (2,553)           227         (3,104)
                                                                         ---------      ---------      ---------
                 Net cash used in operating activities                     (34,528)        (4,563)       (13,614)
Cash flows from investing activities:
   Acquisition of property, equipment, and leasehold improvements          (19,218)       (13,985)       (20,423)
   Purchases of available-for-sale securities                              (42,750)      (174,400)      (197,800)
   Sales of available-for-sale securities                                   60,550        211,000        215,900
    Investment in WaferTech, LLC                                           (12,480)        (9,360)        (9,360)
    Investment in United Integrated Circuits Corp.                          (4,730)       (12,983)            --
   Investment in Nexcom Technology, Inc.                                      (869)            --             --
   Partial sale of ISSI-Taiwan                                              37,594             --             --
   Proceeds from employees for UICC shares                                      --          5,345             --
                                                                         ---------      ---------      ---------
                 Net cash provided by (used in) investing activities        18,097          5,617        (11,683)
Cash flows from financing activities:
   Proceeds from issuance of stock                                           3,122          1,820          2,352
   Borrowings under notes payable and long-term obligations                 81,816         28,659         28,018
   Principal payments of notes payable and long-term obligations           (65,884)       (23,092)       (16,172)
   Decrease (increase) in restricted cash                                    4,800          1,821         (6,037)
                                                                         ---------      ---------      ---------
                 Net cash provided by financing activities                  23,854          9,208          8,161
Effect of exchange rate changes on cash and cash equivalents                (1,981)          (165)           (79)
                                                                         ---------      ---------      ---------
Net increase (decrease) in cash and cash equivalents                         5,442         10,097        (17,215)
Cash and cash equivalents at beginning of year                              22,334         12,237         29,452
                                                                         =========      =========      =========
Cash and cash equivalents at end of year                                 $  27,776      $  22,334      $  12,237
                                                                         =========      =========      =========
</TABLE>



         See the accompanying notes to consolidated financial statements


                                       27
<PAGE>   30

                   Notes to Consolidated Financial Statements


NOTE 1.  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

       Integrated Silicon Solution, Inc. (the "Company") was incorporated in
California on October 27, 1988 and reincorporated in Delaware on August 9, 1993.

BASIS OF PRESENTATION

       The accompanying consolidated financial statements include the accounts
of Integrated Silicon Solution, Inc. and its majority owned subsidiaries, after
elimination of all significant intercompany accounts and transactions.

CASH EQUIVALENTS AND SHORT -TERM INVESTMENTS

       The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.

       Under Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" all affected debt
securities must be classified as held-to-maturity, trading, or
available-for-sale and equity securities must be classified as trading or
available-for-sale. Management determines the appropriate classification of debt
and equity securities at the time of purchase and reevaluates such designation
as of each balance sheet date.

       At September 30, 1998 and 1997, all debt and equity securities were
designated as available-for-sale. Available-for-sale securities are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. The amortized cost for available-for-sale
debt securities is adjusted for the amortization of premiums and accretion of
discounts to maturity. Such amortization is included in investment income.
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in investment
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in investment income. At September 30, 1998 and 1997, the cost of
these securities approximated the fair value and the amount of unrealized gain
or loss was not significant. There were no gains or losses on the sale of
securities for the twelve months ended September 30, 1998 and 1997.

INVENTORIES

       Inventories are stated at the lower of cost (first-in, first-out) or
market. The Company's inventory valuation process is done on a part-by-part
basis. Lower of cost or market adjustments, specifically identified on a
part-by-part basis, reduce the carrying value of the related inventory and take
into consideration reductions in sales prices, excess inventory levels and
obsolete inventory. Once established, these adjustments are considered permanent
and are not reversed until the related inventory is sold or disposed.

PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS

       Property, equipment, and leasehold improvements are stated at cost.
Equipment under capital leases is stated at the present value of minimum lease
payments at the beginning of the lease term. Depreciation and amortization are
computed using the straight-line method, based upon the shorter of the estimated
useful lives ranging from three to seven years, or the lease term of the
respective assets, if applicable, except the building in Taiwan which is being
depreciated over fifty years.



                                       28
<PAGE>   31
                   Notes to Consolidated Financial Statements


REVENUE RECOGNITION

       The Company recognizes revenue to non-distributor customers upon
shipment. The Company provides for estimated sales returns on sales to these
customers. Sales made to distributors, under terms allowing certain rights of
return and price protection on unsold merchandise held by the distributor, are
deferred until the merchandise is sold by the distributor.

FOREIGN CURRENCY TRANSLATION

       The Company uses the local currency as its functional currency for all
foreign subsidiaries. Translation adjustments, which result from the process of
translating foreign currency financial statements into U.S. dollars, are
included as a separate component of stockholders' equity.

USE OF ESTIMATES

       The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

CONCENTRATION OF CREDIT RISK

       The Company operates in one business segment, which is to design,
develop, and market high performance SRAM and NVM integrated circuits. The
Company markets and distributes its products on a worldwide basis, primarily to
original equipment manufacturers and personal computer motherboard
manufacturers. The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral. In fiscal 1998, 1997
and 1996, one customer accounted for approximately 19%, 19% and 22% of net
sales, respectively.

       The Company maintains cash, cash equivalents, and short-term investments
with various financial institutions. The Company's investment policy is designed
to limit exposure to any one institution. The Company performs periodic
evaluations of the relative credit standing of those financial institutions that
are considered in the Company's investment strategy. To date, the Company has
not incurred losses related to these investments.

SEMICONDUCTOR INDUSTRY RISKS

       To date the Company has derived substantially all of its revenues from
the sale of SRAM products. The Company has diversified into other product areas
such as specialty DRAMs, NVM products, and embedded memories, but a substantial
majority of the Company's revenue is still derived from SRAM products. If the
market for SRAM products should decline and the Company has not successfully
diversified, such decline would have a material adverse affect on the Company's
financial performance.

       The semiconductor industry is characterized by rapid technological
change, intense competitive pressure and cyclical market patterns. The Company's
results of operations are affected by a wide variety of factors, including
declines in average selling prices of the Company's products, oversupply of
memory products in the market, failure to introduce new products and to
implement technologies on a timely basis, the timing and announcement of new
product introductions by the Company and its competitors, market acceptance of
the Company's and its customers' products, the failure to anticipate changing
customer product requirements, fluctuations in manufacturing yields, disruption
in delivery and order fulfillment, and disruption in the supply of wafers or
assembly services. Other factors include changes in product mix, seasonal
fluctuations in customer demand for the Company's products, the timing of
significant orders, increased expenses associated with new product introductions
or process changes, the ability of customers to make payments to the Company,
increases in material costs, increases in antidumping duties, increases in costs
associated with the expansion of sales channels, increases in general and
administrative expenses, and certain production and other risks associated with
using independent manufacturers. As a result, the Company may experience
substantial period-to-period fluctuations in future operating results due to the
factors mentioned above or other factors.



                                       29
<PAGE>   32
                   Notes to Consolidated Financial Statements


NET INCOME (LOSS) PER SHARE

           Basic income per share is computed using the weighted number of
common shares outstanding during the period. Diluted income per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the shares issuable upon the exercise of stock options under the
treasury stock method.

       Basic and diluted loss per share is computed using the weighted average
number of shares of common stock outstanding during the period.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

       In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" (FAS No. 130) and Statement No. 131
"Disclosures About Segments of An Enterprise and Related Information" (FAS No.
131). FAS No. 130 establishes rules for reporting and displaying comprehensive
income. FAS No. 131 will require the Company to use the "management approach" in
disclosing segment information. Both statements are effective for the Company
during fiscal 1999. The Company does not believe that the adoption of either FAS
No. 130 or FAS No. 131 will have a material impact on the Company's results of
operations, cash flows, or financial position. However, comprehensive income
will differ from net income.

RECLASSIFICATION OF PRIOR YEAR BALANCES

       Certain reclassifications have been made to prior year's financial
statements to conform to the current year presentation.


NOTE 2.  CASH, CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS

       Cash, cash equivalents, restricted cash, and short-term investments
consisted of the following at September 30:

<TABLE>
<CAPTION>
                                                                1998            1997
                                                               -------        -------
                                                                   (In thousands)
<S>                                                            <C>            <C>    
               Cash                                            $23,893        $21,953
               Money market instruments                            195            480
               Certificates of deposit                           4,021          5,103
               Auction preferred stock                           1,000         13,200
               Municipal bonds due in more than 3 years          6,800         12,400
                                                               -------        -------
                  Total                                        $35,909        $53,136
                                                               =======        =======
</TABLE>

NOTE 3.  INVENTORIES

      Inventories consisted of the following at September 30:

<TABLE>
<CAPTION>
                                                                1998            1997
                                                               -------        -------
                                                                   (In thousands)
<S>                                                            <C>            <C>    
                Purchased components                           $ 5,447        $10,444
                Work-in-process                                 14,868         10,199
                Finished goods                                  26,169         20,087
                                                               =======        =======
                                                               $46,484        $40,730
                                                               =======        =======
</TABLE>

      In fiscal 1998, the Company recorded inventory write-downs of $23.0
million, including $9.6 million in the September quarter. The inventory
write-downs were predominately for lower of cost or market issues on certain of
the Company's products, primarily SRAMs.



                                       30
<PAGE>   33
                   Notes to Consolidated Financial Statements


NOTE 4.  OTHER ASSETS

      Other assets consisted of the following at September 30:

<TABLE>
<CAPTION>
                                                                                    1998            1997
                                                                                   -------        -------
                                                                                        (In thousands)
<S>                                                                                <C>            <C>    
               Investment in United Integrated Circuits Corp. (see Note 14)        $16,486        $19,012
               Investment in WaferTech LLC.  (see Notes 14 and 20)                  31,200         18,720
               Other                                                                 3,766          4,012
                                                                                   =======        =======
                                                                                   $51,452        $41,744
                                                                                   =======        =======
</TABLE>


NOTE 5.  PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS

      Property, equipment, and leasehold improvements consisted of the following
at September 30:

<TABLE>
<CAPTION>
                                                                      1998           1997
                                                                     -------        -------
                                                                          (In thousands)
<S>                                                                  <C>            <C>    
               Machinery and equipment                               $52,462        $49,463
               Furniture and fixtures                                  1,969          1,409
               Building and improvements                              19,205          2,050
                                                                     -------        -------
                                                                      73,636         52,922
               Less accumulated depreciation and amortization         29,320         25,229
                                                                     =======        =======
                                                                     $44,316        $27,693
                                                                     =======        =======
</TABLE>


NOTE 6.  ACCRUED EXPENSES

       Accrued liabilities consisted of the following at September 30:

<TABLE>
<CAPTION>
                                                 1998          1997
                                                ------        ------
                                                   (In thousands)
<S>                                             <C>           <C>   
               UICC shares due employees        $   --        $5,345
               Other                             8,036         3,380
                                                ======        ======
                                                $8,036        $8,725
                                                ======        ======
</TABLE>

       The Company has an equity investment of approximately $16 million
(subject to fluctuations in the New Taiwanese Dollar) in UICC, a wafer
fabrication business venture led by UMC. In fiscal 1997, the Company elected to
re-sell a portion of this investment to its employees at cost, which
approximated fair value, generating a cash inflow to the Company of
approximately $5,345,000. The UICC shares were transferred to the employees in
fiscal 1998 after final approval by UICC and the government of the Republic of
China.

NOTE 7.  NOTES PAYABLE AND LONG-TERM OBLIGATIONS

       At September 30, 1998, ISSI-Taiwan had short-term lines of credit with
various financial institutions whereby it could borrow in aggregate up to
approximately $23,510,000 denominated in a combination of U.S. and New Taiwan
dollars. As of September 30, 1998, the Company had borrowings of approximately
$18,225,000 outstanding under these lines of credit. These lines of credit
expire at various times through September 1999. These lines of credit are
secured by time deposits of approximately $333,000, which are recorded as
restricted cash, as well as approximately $5.8 million at cost of UICC stock.
Commitment fees relating to these lines are not material. At September 30, 1998,
the weighted average interest rate on borrowing under these lines was 8.4%.



                                       31
<PAGE>   34
                   Notes to Consolidated Financial Statements


Long-term obligations consisted of the following at September 30:

<TABLE>
<CAPTION>
                                                                          1998           1997
                                                                         -------        -------
                                                                              (In thousands)
<S>                                                                      <C>            <C>    
Notes payable to bank, due in quarterly installments through 2004
   with interest at 6.82% to 8.82% and secured by the Company's
   property and equipment                                                $15,466        $13,949
Less current portion                                                       3,379          2,251
                                                                         -------        -------
                                                                         $12,087        $11,698
                                                                         =======        =======
</TABLE>

       At September 30, 1998, future minimum principal payments on notes payable
and long-term obligations were as follows (in thousands):

<TABLE>
<S>                                                     <C>  
           1999                                           3,379
           2000                                           3,077
           2001                                           3,077
           2002                                           3,077
           2003                                           2,290
           Thereafter                                       566
                                                        -------
           Total                                        $15,466
                                                        =======
</TABLE>

       Interest of $913,000, $280,000, and $235,000 was capitalized in 1998,
1997, and 1996, respectively, and is included in fixed assets.

NOTE 8.  CAPITAL STOCK

       The Company's Restated Certificate of Incorporation provides for
70,000,000 authorized shares of Common Stock and 5,000,000 authorized shares of
preferred stock. The terms of the preferred stock may be fixed by the Board of
Directors, who have the right to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders of the Company. The rights of the
holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future.

NOTE 9.  STOCK PLANS

1989 STOCK OPTION PLAN

       During 1989, the Company adopted a stock option plan (the "Plan") that
provides for incentive stock options for employees and nonstatutory stock
options for employees, consultants and nonemployee directors of the Company.

       Incentive stock options and nonstatutory options granted under the Plan
have five or ten-year terms. All incentive stock option grants and nonstatutory
stock option grants must be at prices of at least 100% and 85%, respectively, of
the fair market value of the stock on the date of grant, as determined by the
Board of Directors.

       The options are exercisable as determined by the Board of Directors.
Generally, the stock options vest ratably over a four-year period. The options
expire upon the earlier of five or ten years from the date of grant or 30 days
following termination of employment. Options to purchase 1,120,000 shares,
1,164,000 shares, and 791,000 shares were exercisable as of September 30, 1998,
1997, and 1996, respectively.

       In the event of certain changes in control of the Company, the Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; however, if such successor refuses to
assume the then outstanding options, the Plan provides for the full acceleration
of the exercisability of all outstanding options.



                                       32
<PAGE>   35
                   Notes to Consolidated Financial Statements


1996 STOCK OPTION PLAN

       On October 18, 1996, the Company adopted a stock option plan (the "1996
Plan") that provides for non-statutory stock options for non-executive employees
and consultants of the Company.

       Under the terms of the plan, the exercise price and exercise period of
non-statutory stock option grants is determined by the Board of Directors on the
date of grant. Generally, the stock options vest ratably over a four year
period. The options expire upon the earlier of ten years from the date of grant
or 30 days following termination of employment or consultancy. Options to
purchase 430,000 shares and 33,000 shares were exercisable as of September 30,
1998 and 1997, respectively.

       In the event of certain changes in control of the Company, the 1996 Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; however, if such successor refuses to
assume the then outstanding options, the 1996 Plan provides for the full
acceleration of the exercisability of all outstanding options.

1995 DIRECTOR STOCK OPTION PLAN

       The Board of Directors and stockholders approved the 1995 Director Stock
Option Plan ("Director Plan") in December 1995 and January 1996, respectively.
Under the terms of the Plan, 50,000 shares of Common Stock were authorized for
issuance. Each director who has been a non-employee director for at least six
months will automatically receive a non-statutory option to purchase 2,500
shares of Common Stock upon such director's annual reelection to the Board by
the stockholders. Options to purchase 26,000 shares, 13,000 shares and 6,000
shares were exercisable at September 30, 1998, 1997 and 1996, respectively.

      The following table summarizes activity of the 1989, 1996 and Director
Plans:

<TABLE>
<CAPTION>
                                                                Options Outstanding
                                                    -------------------------------------------------
                                    Options         Number                               Weighted-
                                    Available         Of               Price              Average
                                    For Grant       Shares            Per Share        Exercise Price
                                    ---------       ------         ---------------     --------------
                                               (In thousands, except per share data)
<S>                                 <C>             <C>            <C>                 <C>
Balance at September 30, 1995           342          2,051         $0.20 - $59.50         $15.56
      Authorized                      1,050             --               --                   --
      Granted                        (1,609)         1,609         $9.625- $26.00          18.73
      Exercised                          --           (253)        $0.20 - $13.00           3.76
      Canceled                          907           (907)        $0.28 - $59.50          33.42
                                    -----------------------------------------------------------------
Balance at September 30, 1996           690          2,500         $0.20 - $27.50          12.31
      Authorized                        775             --               --                   --
      Granted                        (2,340)         2,340         $5.00 - $10.125          8.72
      Exercised                          --           (197)        $0.20 - $12.25           3.37
      Canceled                        1,095         (1,095)        $0.20 - $27.50          19.98
                                    -----------------------------------------------------------------
Balance at September 30, 1997           220          3,548         $0.28 - $26.00           8.07
      Authorized                      2,218             --               --                   --
      Granted                        (1,463)         1,463         $3.00 - $11.00           8.08
      Exercised                          --           (461)        $0.28 - $10.48           3.63
      Canceled                        1,254         (1,254)        $3.00 - $26.00           8.39
                                    -----------------------------------------------------------------
Balance at September 30, 1998         2,229          3,296         $3.00 - $14.50         $ 8.57
                                    -----------------------------------------------------------------

</TABLE>

       For certain options granted in 1997, 1995 and 1994, the Company
recognized as unearned compensation the excess of the deemed value for
accounting purposes of the common stock issuable upon exercise of such options
over the aggregate exercise price of such options. The deemed value for
accounting purposes represents the fair value at the date of grant. The
compensation expense is being amortized ratably over the vesting period of the
option. Compensation expense amounting to $69,000, $43,000 and $43,000 was
recognized for the years ending September 30, 1998, 1997, and 1996,
respectively.



                                       33
<PAGE>   36
                   Notes to Consolidated Financial Statements


       Outstanding and exercisable options presented by price range at September
30, 1998 are as follows:

<TABLE>
<CAPTION>
                                         Options Outstanding                       Options Exercisable
                           ------------------------------------------------   -------------------------------
                             Number of       Wtd. Average                       Number of
        Range of              Options       Remaining Life    Wtd. Average       Options       Wtd. Average
   Exercise Prices          Outstanding        (Years)       Exercise Price    Exercisable    Exercise Price
---------------------      -------------    --------------   --------------   -------------   ---------------
<S>                        <C>              <C>              <C>              <C>             <C>
$        3.00 - 7.59           589,000             7.81        $    5.53          307,000        $    4.56
         7.75 - 8.00           775,000             9.06             7.92          129,000             7.85
         8.56 - 9.13           381,000             8.66             8.86          159,000             8.91
         9.25 - 9.25           867,000             8.37             9.25          538,000             9.25
        9.38 - 12.25           614,000             7.87            10.69          391,000            10.74
       12.75 - 14.50            70,000             7.05            13.02           52,000            13.09
==========================================================================================================
$       3.00 - 14.50         3,296,000             8.34        $    8.57        1,576,000        $    8.68
==========================================================================================================
</TABLE>


EMPLOYEE STOCK PURCHASE PLAN

       In March 1993, the Company adopted an Employee Stock Purchase Plan
("Purchase Plan") under Section 423 of the Internal Revenue Code. Under the
Company's Purchase Plan, eligible employees may purchase shares of the Company's
common stock through payroll deductions. The shares are purchased at a price
equal to 85% of the lesser of the fair value of the Company's common stock as of
the first day of the 24-month offering period or the last day of each six-month
purchase period. A total of 1,450,000 shares of common stock is reserved for
issuance under the plan, of which 508,000 had been issued as of September 30,
1998.

STOCK-BASED COMPENSATION

       As permitted under FAS 123, the Company has elected to follow APB 25 and
related Interpretations, in accounting for stock-based awards to employees.
Under APB 25, the Company generally recognized no compensation expense with
respect to such awards.

       Pro forma information regarding net income (loss) and earnings (loss) per
share is required by FAS 123 for awards granted or modified after September 30,
1995 as if the Company had accounted for its stock-based awards to employees
under the fair value method of FAS 123. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock-based awards to employees have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated assuming no
expected dividends and the following weighted-average assumptions:

<TABLE>
<CAPTION>
                                           STOCK OPTIONS                                    ESPP
                               -------------------------------------        -------------------------------------

                                1998           1997           1996           1998           1997           1996
                               -------        -------        -------        -------        -------        -------
<S>                            <C>            <C>            <C>            <C>            <C>            <C>
Expected life (years)              5.0            5.0            5.0            0.5            0.5            0.5
Expected volatility                .76            .70            .70            .72            .53            .73
Risk-free interest rate           5.50           6.43           6.11           5.33           5.50           5.34
</TABLE>

       The weighted-average fair value of options granted at market value during
fiscal 1998, 1997 and 1996 was $3.81, $4.02 and $9.75 per share, respectively.
The weighted-average fair value of employee stock purchase rights during fiscal
1998, 1997 and 1996 was $3.89, $5.33 and $5.20 per share, respectively.



                                       34
<PAGE>   37
                   Notes to Consolidated Financial Statements


       For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
(for options) and the six-month purchase period (for stock purchases under the
ESPP). The Company's pro forma information for the years ended September 30, is
as follows (in thousands, except for income (loss) per share information):

<TABLE>
<CAPTION>
                                                    1998               1997               1996
                                                 ----------         ----------         ----------
<S>                                              <C>                <C>                <C>       
Net income (loss)
     As reported                                 $  (43,933)        $   (7,686)        $    1,015
     Pro forma                                   $  (48,890)        $  (14,814)        $   (4,754)

Basic and diluted income (loss) per share
     As reported                                 $    (2.32)        $    (0.43)        $     0.06
     Pro forma                                   $    (2.58)        $    (0.83)        $    (0.27)
</TABLE>

       Because FAS 123 is applicable only to awards granted subsequent to
September 30, 1995, its pro forma effect will not be fully reflected until
fiscal 1999 and is not expected to be indicative of the effects on net income
(loss) and net income (loss) per share in future years.

NOTE 10.  STOCKHOLDERS' EQUITY

       The Company is subject to legal restrictions related to its distribution
of ISSI-Taiwan earnings. In accordance with the Corporate Law of the Republic of
China, before ISSI-Taiwan declares any part of net income as dividends and/or
bonuses, ISSI-Taiwan must transfer 10% of its statutory net income to a legal
reserve until such reserve is equal to ISSI-Taiwan's capital. At September 30,
1998, such restricted equity amounted to approximately $5,022,000. The legal
reserve is not available for distribution; however, when the reserve exceeds 50%
of ISSI-Taiwan's capital, 50% of the legal reserve in excess of 50% of
ISSI-Taiwan's capital may be distributed in the form of stock. The reserve may
be utilized at any time to offset a deficit. In addition, any distribution of
equity of ISSI-Taiwan must allocate 1% of the related distribution to employees
of ISSI-Taiwan.

NOTE 11.  INCOME TAXES

      The provision (benefit) for income taxes consisted of the following for
the years ended September 30:

<TABLE>
<CAPTION>
                                  1998            1997            1996
                                 -------         -------         -------
                                              (In thousands)
<S>                              <C>             <C>             <C>    
Current:
   Federal                       $   114         $(2,558)        $ 3,137
   State                              36               1             335
   Foreign                         2,377             116             200
                                 -------         -------         -------
Total current                    $ 2,527         $(2,441)        $ 3,672

Deferred:
   Federal                         2,289           2,584          (3,062)
   State                              --              --            (614)
   Foreign                          (148)         (1,287)         (1,154)
                                 -------         -------         -------
Total deferred                     2,141           1,297          (4,830)
                                 -------         -------         -------
Total provision (benefit)        $ 4,668         $(1,144)        $(1,158)
                                 =======         =======         =======
</TABLE>

       Pretax income from foreign operations was approximately $200,000,
$9,207,000, and $153,000 for 1998, 1997 and 1996, respectively.


                                       35
<PAGE>   38

                   Notes to Consolidated Financial Statements


       The Company's provision (benefit) for income taxes differs from the
amount computed by applying the U.S. federal statutory rate (35%) to income
before taxes and minority interest as follows for the years ended September 30:

<TABLE>
<CAPTION>
                                                                  1998             1997             1996
                                                                --------         --------         -------- 
                                                                              (In thousands)
<S>                                                             <C>              <C>              <C>      
Income taxes computed at the U.S. federal statutory rate        $(13,782)        $ (3,097)        $    (75)
Valuation of deferred tax assets                                  11,105            6,546            1,104
Net operating loss utilized                                       (2,898)              --               --
Foreign earnings taxed at lower than U.S. rate                       (62)          (4,368)          (1,006)
Foreign withholding taxes                                          2,373               --               --
Tax exempt interest income                                           (93)            (328)            (694)
Gain on sale of ISSI-Taiwan stock                                  5,554               --               --
In-process research and development                                2,477               --               --
Other individually immaterial items                                   (6)             103             (487)
                                                                ========         ========         ========
     Total provision (benefit)                                  $  4,668         $ (1,144)        $ (1,158)
                                                                ========         ========         ========
</TABLE>

           As of September 30, 1998 the Company has federal net operating loss
carryforwards of approximately $9,000,000. The Company has federal research and
development credit carryforwards, foreign tax credits and alternative minimum
tax credit carryforwards of approximately $2,600,000, $2,500,000 and $500,000,
respectively. The Company also has state research and manufacturers' investment
tax credit carryforwards of approximately $900,000 and $250,000. The net
operating losses, research credit carryforwards, foreign tax credit
carryforwards and state manufacturers' investment tax credit carryforwards will
expire at various dates beginning in 2003 through 2013, if not utilized. In
addition, ISSI-Taiwan has investment tax credit carryforwards of approximately
$5,000,000 that will expire at various dates beginning in 1999 through 2002, if
not utilized.

           Utilization of the net operating loss carryforwards and credits may
be subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating losses and credits before utilization.

           Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. Significant
components of deferred taxes consisted of the following at September 30:

<TABLE>
<CAPTION>
                                                                  1998             1997
                                                                --------         --------
                                                                      (In thousands)
<S>                                                             <C>              <C>     
Deferred tax assets:
    Depreciation                                                $    577         $    607
    Reserves and write-downs not currently deductible             11,961            3,159
    Accrued expenses                                               2,983            2,053
    Taiwan - investment tax credit carryforwards                   5,383            4,480
    Federal and state credit carryforwards                         6,548            2,040
    Federal and state net operating loss carryforwards             3,204            6,236
    Other, net                                                     1,185               13
                                                                --------         --------
Total deferred tax assets                                         31,841           18,588
    Valuation allowance                                          (29,667)         (13,858)
                                                                --------         --------
Net deferred tax assets                                         $  2,174         $  4,730
                                                                ========         ========
</TABLE>

           Management has established a valuation allowance for the U.S. portion
of the gross deferred tax assets based on management's belief that the
realization of the U.S. deferred tax assets is not realizable on a more likely
than not basis. Management has determined, based on ISSI-Taiwan's history of
prior operating earnings and its expectation of future taxable income, that a
partial valuation allowance for ISSI-Taiwan's deferred tax assets should be
provided. Although realization of the ISSI-Taiwan deferred tax assets is not
assured, management believes that it is more likely than not that the deferred
tax asset will be realized. The amount of the deferred tax asset considered



                                       36
<PAGE>   39
                   Notes to Consolidated Financial Statements


realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced. The valuation
allowance for deferred tax assets increased by $15,809,000 and $6,695,000 during
1998 and 1997, respectively. Approximately, $2,450,000 of the valuation
allowance is attributable to tax benefits of stock option deductions, which will
be credited to paid in capital when recognized.

           As a result of its location in the Hsinchu Science-Based Industrial
Park in Taiwan, ISSI-Taiwan has received a tax exemption for taxable income
beginning October 1, 1992. ISSI-Taiwan continuously extends this 4-year
exemption each time it expands its capital assets and uses the capital to
purchase qualified machinery. The precise amount of the exemption is calculated
annually based upon the extent of ISSI-Taiwan's net operating taxable income and
measured by certain factors, including use of qualified manufacturing equipment,
self-manufacturing costs and qualified sales revenue. The portion of
ISSI-Taiwan's taxable income which is not subject to exemption is taxed at a
flat 20% tax rate.

           Cumulative net undistributed earnings of ISSI-Taiwan for which no
residual U.S. taxes have been provided aggregate approximately $28,000,000 at
September 30, 1998. These earnings are considered to be permanently invested in
non-U.S. operations. Upon distribution of these earnings in the form of
dividends or otherwise, the Company would be subject to both U.S. income taxes
and withholding tax payable to the foreign country. Determination of the amount
of unrecognized deferred U.S. tax liability is not practical because of the
complexities associated with its hypothetical calculation. However, a U.S.
foreign tax credit for the withholding tax payable on the distribution would be
available to reduce U.S. taxes.

NOTE 12.  PER SHARE DATA

           The calculations of basic and diluted income (loss) per share for
each of the three years ended September 30, 1998 are as follows:

<TABLE>
<CAPTION>
                                                               Years Ended September 30,
                                                         1998             1997             1996
                                                       --------         --------         --------
                                                          In thousands, except per share data
<S>                                                    <C>              <C>              <C>     
Net income (loss)                                      $(43,933)        $ (7,686)        $  1,015
                                                       ========         ========         ========

Denominator for basic income (loss) per share:
     Weighted average common shares
         outstanding                                     18,940           17,748           17,457
Denominator for basic income (loss) per share            18,940           17,748           17,457
                                                       --------         --------         --------

Dilutive stock options                                       --               --              899
                                                       --------         --------         --------
Denominator for diluted income (loss) per share          18,940           17,748           18,356
                                                       ========         ========         ========

Basic income (loss) per share                          $  (2.32)        $  (0.43)        $   0.06
                                                       ========         ========         ========
Diluted income (loss) per share                        $  (2.32)        $  (0.43)        $   0.06
                                                       ========         ========         ========
</TABLE>

           The above diluted calculation for the years ended September 30, 1998,
1997 and 1996, does not include approximately 2,497,000, 1,418,000 and 797,000
shares attributable to options as of September 30, 1998, 1997 and 1996,
respectively, as their impact would be anti-dilutive.



                                       37
<PAGE>   40
                   Notes to Consolidated Financial Statements


NOTE 13.  GEOGRAPHIC AND SEGMENT INFORMATION

       The Company operates in one business segment, which is to design,
develop, and market high-performance SRAM and NVM integrated circuits. The
following table summarizes the Company's operations in different geographic
areas:

<TABLE>
<CAPTION>
                                                                 Year Ended September 30, 1998
                                             -------------------------------------------------------------------
                                                                                   Adjustments/
                                             United States          Taiwan         Eliminations      Consolidated
                                             -------------        ----------       ------------      -----------
                                                                        (In thousands)
<S>                                          <C>                  <C>              <C>               <C>       
Sales to unaffiliated customers                $   83,223         $   47,909        $       --        $  131,132
Transfers between geographic areas                  2,155             69,495           (71,650)               --
                                               ----------         ----------        ----------        ----------
Total net sales                                $   85,378         $  117,404        $  (71,650)       $  131,132
                                               ==========         ==========        ==========        ==========

Operating income (loss)                        $  (56,374)        $    3,266        $       55        $  (53,053)
                                               ==========         ==========        ==========        ==========

Identifiable assets                            $   84,399         $  128,115        $  (10,346)       $  202,168
                                               ==========         ==========        ==========        ==========

Cash, cash equivalents, restricted cash
    and short-term investments                 $   30,072         $    5,837        $       --        $   35,909
                                               ==========         ==========        ==========        ==========

Accounts receivable from third-party
    customers                                  $   10,170         $    8,899        $       --        $   19,069
                                               ==========         ==========        ==========        ==========
</TABLE>


<TABLE>
<CAPTION>
                                                                  Year Ended September 30, 1997
                                              -------------------------------------------------------------------
                                                                                   Adjustments/
                                              United States         Taiwan         Eliminations      Consolidated
                                              -------------       ----------       ------------      ------------
                                                                        (In thousands)
<S>                                           <C>                 <C>              <C>               <C>       
Sales to unaffiliated customers                $   63,247         $   45,014        $       --        $  108,261
Transfers between geographic areas                  3,586             69,795           (73,381)               --
                                               ----------         ----------        ----------        ----------
Total net sales                                $   66,833         $  114,809        $  (73,381)       $  108,261
                                               ==========         ==========        ==========        ==========

Operating loss                                 $  (20,504)        $    8,995        $      733        $  (10,776)
                                               ----------         ----------        ----------        ----------

Identifiable assets                            $  115,477         $  123,676        $  (43,557)       $  195,596
                                               ==========         ==========        ==========        ==========

Cash, cash equivalents, restricted cash
    and short-term investments                 $   40,737         $   12,399        $       --        $   53,136
                                               ==========         ==========        ==========        ==========

Accounts receivable from third-party
    customers                                  $   10,705         $    7,773        $       --        $   18,478
                                               ==========         ==========        ==========        ==========
</TABLE>



                                       38
<PAGE>   41

                   Notes to Consolidated Financial Statements


<TABLE>
<CAPTION>
                                                                    Year Ended September 30, 1996
                                              -----------------------------------------------------------------------
                                                                                       Adjustments/
                                              United States          Taiwan            Eliminations       Consolidated
                                              -------------        -----------         ------------       -----------
                                                                            (In thousands)
<S>                                           <C>                  <C>                 <C>                <C>        
Sales to unaffiliated customers                $    85,676         $    46,363         $        --        $   132,039
Transfers between geographic areas                   6,250              70,450             (76,700)                --
                                               -----------         -----------         -----------        -----------
Total net sales                                $    91,926         $   116,813         $   (76,700)       $   132,039
                                               ===========         ===========         ===========        ===========

Operating loss                                 $    (3,751)        $      (615)        $      (317)       $    (4,683)
                                                ----------          ----------          ----------         ----------

Identifiable assets                            $   115,331         $    76,976         $   (14,268)       $   178,039
                                               ===========         ===========         ===========        ===========

Cash, cash equivalents, restricted cash
    and short-term investments                 $    74,498         $     6,962         $        --        $    81,460
                                               ===========         ===========         ===========        ===========

Accounts receivable from third-party
    customers                                  $     6,910         $     4,406         $        --        $    11,316
                                               ===========         ===========         ===========        ===========
</TABLE>

       Transfers between geographic areas are accounted for at amounts which are
generally above cost and consistent with rules and regulations of governing tax
authorities. Such transfers are eliminated in the consolidated financial
statements.

       Identifiable assets by geographic area are those assets used in the
Company's operations in each area.

       Total assets and liabilities for ISSI-Taiwan amounted to approximately
$128,115,000 and $84,089,000, respectively, at September 30, 1998. Included in
the assets and liabilities of ISSI-Taiwan were intercompany receivables
amounting to approximately $2,697,000 at September 30, 1998. Pre-tax income for
ISSI-Taiwan for the year ended September 30, 1998 was approximately $195,000.

       Export sales by the U.S. operating company were approximately
$26,393,000, $14,125,000, and $15,741,000, for the years ended September 30,
1998, 1997, and 1996, respectively.

       Net foreign currency transaction gains (losses) of approximately
$(3,188,000), $(17,000), and $311,000 for the years ended September 30, 1998,
1997 and 1996, respectively, were primarily the result of the settlement of
intercompany transactions and are included in the determination of net income.

NOTE 14.  COMMITMENTS AND CONTINGENCIES

PATENTS AND LICENSES

       In the semiconductor industry it is typical for companies to receive
notices from time to time alleging infringement of patents or other intellectual
property rights of others. The Company has been, and from time-to-time expects
to be, notified of claims that it may be infringing patents, maskwork rights or
copyrights owned by third parties. Although none of these companies have pursued
a claim against the Company, there can be no assurance that other companies will
not in the future pursue claims against the Company with respect to the alleged
infringement of patents, maskwork rights, copyrights or other intellectual
property owned by third parties. If it appears necessary or desirable, the
Company may seek licenses under patents that it is alleged to be infringing.
Although patent holders commonly offer such licenses, there is no assurance that
any licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license under a key patent or
intellectual property right from a third party for technology used by the
Company could cause the Company to incur substantial liabilities and to suspend
the manufacture of the products utilizing the invention or to attempt to develop
non-infringing products, any of which could materially and adversely affect the
Company's



                                       39
<PAGE>   42
                   Notes to Consolidated Financial Statements


business and operating results. Furthermore, there can be no assurance that the
Company will not become involved in protracted litigation regarding the alleged
infringement by the Company of third party intellectual property rights or
litigation to assert and protect patents or other intellectual property rights
of the Company. Any litigation relating to patent infringement or other
intellectual property matters could result in substantial cost and diversion of
resources by the Company which could materially and adversely affect the
Company's business and operating results.

LITIGATION

           On April 22, 1998, the U.S. Department of Commerce ("DOC") published
an amended antidumping duty order on imports of SRAMs from Taiwan from where the
Company currently imports a majority of its SRAMs. As a consequence of this
antidumping duty order, the Company is required to post a cash deposit on
imports of Taiwan fabricated SRAM wafers or devices, at the ad valorem rate of
7.56%. The cash deposits subsequently could be returned to the Company or,
alternatively, the Company could forfeit amounts deposited and owe duties and
interest in addition to the amounts deposited. The outcome is dependent on
whether the DOC conducts an administrative review of imports entered after the
imposition of the antidumping order, and if so, on the results of the DOC
review. The decision on whether to conduct a review will be made in 1999 and the
results of the review will be issued in the year 2000.

           The Company has retained legal counsel to defend and assist in its
interests in the antidumping proceedings. In addition, certain aspects of the
antidumping determination are being challenged in federal court proceedings by
some of the respondents to the investigation, and these proceedings could result
in the termination of this antidumping case. Duties calculated and assessed by
the government could have a material adverse affect on the Company's gross
margins and profits. There can be no assurance that any reviews or proceedings
will mitigate or eliminate antidumping duties.

           On October 22, 1998, Micron Technology filed an anti-dumping petition
against DRAMs fabricated in Taiwan. Currently, the Company's DRAM products are
fabricated in Taiwan. The case is expected to take from 12 to 18 months to
complete. If the petition is upheld, the Company could face DRAM duties, unless
it is able to secure DRAM from outside of Taiwan. Currently, DRAM accounts for
less than 10% of the Company's revenue.

LEASES

       The Company leases its facilities and the land upon which ISSI-Taiwan is
constructing its new Taiwan facility under operating lease agreements that
expire at various dates through 2016. The Company entered into a ten year lease
effective December 1, 1996 for its headquarters facility in Santa Clara,
California. The Company has subleased approximately 25% of the Santa Clara
facility and the sublease expires in March 2000. Minimum rental commitments
under these leases are as follows (in thousands):

<TABLE>
<S>                                                                     <C>    
           1999  (net of sublease income of $501)                       $ 1,045
           2000  (net of sublease income of $285)                         1,231
           2001                                                           1,367
           2002                                                           1,423
           2003                                                           1,479
           Thereafter                                                     6,247
                                                                        -------
           Total minimum rental commitments                             $12,792
                                                                        =======
</TABLE>

       Total rental expense for the years ended September 30, 1998, 1997, and
1996 was approximately $1,078,000 (net of sublease income of $375,000),
$1,372,000 (net of sublease income of $148,000), and $637,000, respectively.



                                       40
<PAGE>   43
                   Notes to Consolidated Financial Statements


COMMITMENTS TO WAFER FABRICATION FACILITIES

       In June 1996, the Company entered into a business venture "WaferTech,
LLC" with TSMC, Altera, Analog Devices, and private investors to build a wafer
fabrication facility in Camas, Washington. The Company agreed to invest $31.2
million for a 4% equity interest in the venture and as of September 30, 1998 all
of this amount had been paid. The last scheduled payment to WaferTech by the
Company of $12.5 million was made in November 1997. The Company is accounting
for this investment on the cost basis. In December 1998, the Company agreed to
sell approximately 33% of its investment in WaferTech to TSMC for approximately
$10.0 million. The transaction is expected to close in January 1999. Upon
completion of the transaction, the Company will have a 2.67% interest in
WaferTech.

       The Company has also agreed to certain minimum wafer purchase commitments
with its foundry partners in exchange for wafer capacity commitments. In fiscal
1995, the Company entered into an agreement with TSMC pursuant to which the
Company agreed to acquire specified wafer capacity through 2001. The Company
also agreed to make certain annual payments totaling approximately $19.2 million
through 2001 to TSMC for additional capacity above the annual base capacity.
Wafer purchases in any given year are first applied to the base capacity and
then to the Company's $19.2 million obligation. As a result, the $19.2 million
may be subject to forfeiture if the Company does not purchase the base capacity
and additional capacity for which it has contracted. To date, the Company has
never forfeited any amounts under this agreement. The Company also has minimum
purchase obligations to TSMC related to WaferTech LLC. The Company is obligated
to purchase from WaferTech or TSMC a minimum of 3.4% of WaferTech's installed
capacity. Initial wafer outs occurred in the second half of calendar 1998.
Although the Company has rights to re-schedule or assign capacity to another
party, there can be no assurance that such re-schedule or assignment would be
successfully accomplished. Should the Company fail to re-schedule or assign
unneeded capacity, the Company's business and operating results could be
adversely affected.

In fiscal 1995, the Company entered into a business venture "United Integrated
Circuits Corp" ("UICC") with UMC and other investors to build a wafer
fabrication facility in Hsinchu, Taiwan. The Company has invested approximately
$16.5 million (subject to fluctuations in the New Taiwanese Dollar) for a 4%
equity interest in the venture of which UMC retains 55% ownership. The final
payment of approximately $4.7 million was made to UICC in December 1997. The
Company is accounting for this investment on the cost basis. The UICC facility
was severely damaged by fire in October 1997. It is the Company's understanding
that the damage was covered by insurance. UICC has undertaken a clean up of the
facility, but reconstruction has not commenced as an alternative site is being
evaluated. A decision as to whether to build on the existing site or the
alternative site has not yet been made. The Company believes that its investment
of $16.5 million is recoverable.

NOTE 15.  EMPLOYEE BENEFIT PLAN

       In August 1992, the Company established a defined contribution retirement
plan with 401(k) plan features. The plan covers all United States employees 18
years and older. Employees may make contributions by a percentage reduction in
their salaries, up to $10,000 for 1998. The Company elected to make no
contributions during the years ended September 30, 1998, 1997 and 1996.
Administrative expenses relating to the plan are insignificant.

NOTE 16.  SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                          Years Ended September 30,
                                                    1998            1997             1996
                                                  --------        --------         --------
                                                               (In thousands)
<S>                                               <C>             <C>              <C>     
Cash paid for interest                            $  2,896        $  1,431         $    478
Cash paid (refunded) for income taxes                2,561          (5,004)           8,603
Notes payable issued for other assets                   --              --          (31,200)
Tax benefit from sale of common stock                   --              --              103
Fixed assets acquired for accounts payable           4,440              --               --
Stock issued in acquisition of Nexcom                6,377              --               --
Assets acquired from Nexcom                          2,515              --               --
Liabilities assumed from Nexcom                      3,762              --               --
</TABLE>



                                       41
<PAGE>   44
                   Notes to Consolidated Financial Statements


NOTE 17.  TRANSACTIONS

       On December 3, 1997, the Company completed its acquisition of Nexcom
Technology, Inc. ("Nexcom") in exchange for the issuance of 772,693 shares of
Common Stock, $0.5 million in cash, and the assumption of $1.2 million of net
liabilities (total consideration of approximately $8.5 million). The transaction
was accounted for as a purchase and resulted in an in-process technology charge
of approximately $7.1 million in the Company's December 31, 1997 quarter. Nexcom
was formed in 1990 and has been engaged primarily in the research and
development of non-volatile flash memory technology.

           On June 29, 1998, the Company sold approximately 46% of ISSI-Taiwan
to a group of private investors. The price was privately negotiated between the
parties. Cash proceeds from the transaction totaled $35.5 million net of
withholding and transaction taxes. The transaction resulted in a pre-tax gain of
$17.2 million which is recorded in the Company's June 30, 1998 quarter.

NOTE 18.  RELATED PARTY TRANSACTIONS

       For the year ended September 30, 1996, the Company purchased
approximately $1,342,000 of services from Taicera Electronics Company, an
assembly plant that is an affiliate of the Fu Sheng Industrial Group, whose
chairman was a member of the Company's Board of Directors until April 1997. At
September 30, 1996, the Company had no balance due to Taicera Electronics
Company.

NOTE 19.  SPIN-OFF OF NEXFLASH TECHNOLOGIES, INC.

           Effective October 1, 1998, the Company transferred certain employees
and joint ownership of certain patents and related Flash technology to a newly
formed company, NexFlash Technologies, Inc. The Company and NexFlash jointly own
existing Flash related patents and NexFlash will continue development of Flash
products. The Company owns approximately 32% of NexFlash, and ISSI-Taiwan owns
approximately 17%, which includes approximately 6% of NexFlash purchased for
$1,000,000. The Company's President is the acting Chief Executive Officer of
NexFlash.

           In connection with the NexFlash transaction, the Company issued
warrants to purchase an aggregate of 981,659 shares of ISSI Common Stock at an
exercise price of $3.76 per share to the NexFlash investors. The warrants expire
on November 4, 2000.

NOTE 20.  SUBSEQUENT EVENTS (UNAUDITED)

1998 ISSI-TAIWAN STOCK PLAN

           On October 29, 1998, the Company adopted the 1998 ISSI-Taiwan Stock
Plan "Taiwan Stock Plan" that provides for non-statutory stock options in the
common stock of ISSI-Taiwan for employees, consultants, and directors of the
Company. Upon exercise, if any, the Company would sell its shares in ISSI-Taiwan
to the optionee. Under terms of the Taiwan Stock Plan, the maximum aggregate
number of shares of ISSI-Taiwan stock which may be optioned and sold is twelve
million. This represents approximately 10% of the outstanding shares of
ISSI-Taiwan.

           Under the terms of the plan, the exercise price, which is deemed to
be fair value, and the exercise period of the non-statutory stock option grants
are determined by the Board of Directors on the date of grant. Generally, the
stock options vest one-third annually on the anniversary of the date of grant.
The options expire upon the earlier of ten years from the date of grant or 30
days following termination of employment or consultancy.

           In the event of an optionee's termination of status as an employee or
consultant of the Company, without cause, within twelve months of certain
changes of control of the Company, the Taiwan Stock Plan provides for full
acceleration of the exercisability of all outstanding options.



                                       42
<PAGE>   45
                   Notes to Consolidated Financial Statements


PARTIAL SALE OF INVESTMENT IN WAFERTECH

           In December 1998, the Company agreed to sell approximately 33% of its
investment in WaferTech to TSMC for approximately $10.0 million. The transaction
is expected to close in January 1999. Upon completion of the transaction, the
Company will have a 2.67% interest in WaferTech.

REPRICE OF STOCK OPTIONS

           On December 2, 1998, the Board of Directors approved the repricing of
certain options outstanding previously granted to employees of the Company.
Approximately 2,007,000 shares with an aggregate exercise price of approximately
$17.3 million were repriced to an exercise price of $3.1562 per share. In
connection with the repricing, certain vesting and exercise rights were
surrendered.



                                       43
<PAGE>   46

ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
             FINANCIAL DISCLOSURE

       Not applicable.

                                    PART III

       Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on January 29, 1999, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

       (a)   Executive Officers - See the section entitled "Executive Officers"
             in Part I, Item 1 hereof.

       (b)   Directors - The information required by this Item is incorporated
             by reference to the section entitled "Election of Directors" in the
             Proxy Statement

       The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.

ITEM 11.     EXECUTIVE COMPENSATION

       The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       The information required by this Item is incorporated by reference to the
sections entitled "Principal Share Ownership" and "Security Ownership of
Management" in the Proxy Statement.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.

                                     PART IV

ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

       (a) List of documents filed as part of this Report.



                                       44
<PAGE>   47

       1.    FINANCIAL STATEMENTS

       The following consolidated financial statements of Integrated Silicon
Solution, Inc. are contained in Part II, Item 8 of this Report on Form 10-K:

Report of Ernst & Young LLP, Independent Auditors
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements

       2.    FINANCIAL STATEMENT SCHEDULE

       The following financial statement schedule of Integrated Silicon
Solution, Inc. is contained in Part IV, Item 14(d) of this report on Form 10-K:

Schedule II-Valuation and Qualifying Accounts

       All other schedules for which provision is made in the Applicable
Accounting Regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.

       3.    EXHIBITS

<TABLE>
<CAPTION>
       Exhibit
       Number             Description of Document
       ------             -----------------------
<S>                       <C>
       2.1(6)             Agreement and Plan of Reorganization dated November 5,
                          1997 by and among the Company, Nexcom Technology, Inc.
                          and certain shareholders of Nexcom Technology, Inc.

       3.1(2)             Restated Certificate of Incorporation of Registrant.

       3.3(1)             Bylaws of Registrant.

       4.2(1)             Form of Common Stock Certificate.

       10.1(1)            Form of Indemnification Agreement.

       10.2(1)***         Form of 1993 Employee Stock Purchase Plan, as amended,
                          and form of Subscription Agreement.

       10.3(1)***         Form of 1989 Stock Plan, as amended, and form of Stock
                          Option Agreements.

       10.4(1)            Information and Registration Rights Agreement dated as
                          of March 17, 1993 among the Registrant and certain
                          holders of the Registrant's Common Stock, as amended.

       10.5(1)*           Letter Agreement dated September 14, 1994 between
                          Taiwan Semiconductor Manufacturing Company, Ltd.
                          ("TSMC") and the Registrant.

       10.6(1)*           Joint Development Contract between Chartered
                          Semiconductor Manufacturing Pte.Ltd. and the
                          Registrant dated July 21, 1994.

       10.7(1)            Subscription and Shareholders Agreement Relating to
                          Valery Limited dated March 30, 1994.

       10.8(1)            Long term line of credit between Bank of Communication
                          and Registrant.

       10.9(1)            Short term line of credit between International
                          Commercial Bank of China and Registrant.

       10.10(1)***        1995 Director Stock Option Plan.

       10.11(2)*          Option I Agreement between the Registrant and TSMC
                          dated April 21, 1995.

       10.12(2)*          Option II Agreement between the Registrant and TSMC
                          dated April 21, 1995.

       10.13(3)*          UMC/ISSI-Taiwan Foundry Venture Agreement dated August
                          31, 1995.

       10.14(3)*          UMC/ISSI-Taiwan Fabven Foundry Capacity Agreement
                          dated August 31, 1995.

       10.15              Second Amended and Restated Limited Liability Company
                          Agreement of WaferTech, LLC, a Delaware limited
                          liability company, dated as of October 28, 1997.
</TABLE>



                                       45
<PAGE>   48

<TABLE>
<S>                       <C>

       10.16(4)**         Purchase Agreement by and between Taiwan Semiconductor
                          Manufacturing Corporation, as Seller, and Analog
                          Devices, Inc., Altera Corporation and Integrated
                          Silicon Solution, Inc., as Buyers.

       10.17(5)*          Amendment to Option I and Option II Agreement between
                          the Company and TSMC dated September 23, 1996.

       10.18(5)           Sublease Agreement for facility located at 2231 Lawson
                          Lane, Santa Clara, California.

       10.19(7)***        Nonstatutory Stock Plan

       10.20***           1998 ISSI-Taiwan Stock Plan

       21.1(1)            Subsidiaries of the Registrant

       23.1               Consent of Ernst & Young LLP, Independent Auditors

       24.1               Power of Attorney (see page 47).

       27.1               Financial Data Schedule
</TABLE>

----------

*      Confidential treatment granted for certain portions of this exhibit.

**     Confidential treatment requested for certain portions of this exhibit.
       The portions of this exhibit for which confidential treatment is being
       requested have been blacked out in the copies filed with the related
       report and the confidential portions so omitted have been filed
       separately with the Securities and Exchange Commission.

***    Management contract or compensatory plan or arrangement required to be
       filed as an exhibit to this Report on Form 10-K pursuant to form 14(c) of
       this report.

(1)    Incorporated by reference to the Company's Registration Statement on Form
       S-1, as amended (file no. 33-72960).

(2)    Incorporated by reference to the Company's Registration Statement on Form
       S-1, as amended (file no. 33-91520).

(3)    Incorporated by reference to the Company's Annual Report on Form 10-K for
       the period ended September 30, 1995.

(4)    Incorporated by reference to the Company's Quarterly Report on Form 10-Q
       for the period ended June 30, 1996.

(5)    Incorporated by reference to the Company's Annual Report on Form 10-K for
       the period ended September 30, 1996.

(6)    Incorporated by reference to the Company's Annual Report on Form 10-K for
       the period ended September 30, 1997.

(7)    Incorporated by reference to the Company's Registration Statement on Form
       S-8 filed April 30, 1997.

         (b)   Reports on Form 8-K
               On July 14, 1998, the Company filed a Form 8-K for the purpose of
               disclosing the sale of certain shares of ISSI-Taiwan to a group
               of private investors.

         (c)   Exhibits
               See (a) above

         (d)   Financial statement schedules
               See (a) above



                                       46
<PAGE>   49

                                   SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Santa Clara, State of California, on the 11th day of December, 1998.


                                        INTEGRATED SILICON SOLUTION, INC.

                                        By     /s/ Gary L. Fischer 
                                               --------------------
                                               Gary L. Fischer
                                               Executive Vice President,
                                               Office of the President and
                                               Chief Financial Officer


                                POWER OF ATTORNEY

       KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Jimmy S.M. Lee and Gary L.
Fischer, and each of them acting individually, as his or her attorney-in-fact,
each with full power of substitution, for him or her in any and all capacities,
to sign any and all amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and all amendments
to said Report.

       Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below on December 11, 1998 by the
following persons on behalf of the Registrant and in the capacities indicated.

<TABLE>
<CAPTION>
        Signature                                         Title
-------------------------------        --------------------------------------------------
<S>                                    <C>
/s/ Jimmy S.M. Lee                     Chairman of the Board, Chief Executive Officer,
-------------------------------        and President (Principal Executive Officer)
(Jimmy S.M. Lee)

/s/ Kong-Yeu Han                       Executive Vice President, General Manager,
-------------------------------        Taiwan and Director
(Kong-Yeu Han)

/s/ Gary L. Fischer                    Executive Vice President, Office of the President
-------------------------------        and Chief Financial Officer (Principal Financial
(Gary L. Fischer)                      and Accounting Officer)

/s/ Pauline L. Alker                   Director
-------------------------------
(Pauline L. Alker)

/s/ Lip-Bu Tan                         Director
-------------------------------
(Lip-Bu Tan)

/s/ Hide Tanigami                      Director
-------------------------------
(Hide Tanigami)

/s/ Chun Win Wong                      Director
-------------------------------
(Chun Win Wong)
</TABLE>



                                       47
<PAGE>   50

ITEM 14(d).  FINANCIAL STATEMENT SCHEDULE



                       INTEGRATED SILICON SOLUTION, INC.
                                  SCHEDULE II
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)



<TABLE>
<CAPTION>
                                                                     Addition
                                                    Balance at      Charged to                         Balance
                                                    Beginning        Costs and                         at End
                                                    of Period        Expenses       Deductions        of Period
                                                    ---------       -----------     ----------        --------
<S>                                                 <C>             <C>             <C>               <C>  
Year ended September 30, 1996:
  Allowance for doubtful accounts ...........           1,297             714              (9)(1)        2,002
  Sales returns reserve .....................           2,701             665          (1,133)           2,233
Year ended September 30, 1997:
  Allowance for doubtful accounts ...........           2,002             675            (409)(1)        2,268
  Sales returns reserve .....................           2,233           1,713          (1,510)           2,436
Year ended September 30, 1998:
  Allowance for doubtful accounts ...........           2,268              --            (464)(1)        1,804
  Sales returns reserve .....................           2,436             858          (1,419)           1,875
</TABLE>


(1)  Uncollectible accounts written off, net of recoveries



                                       48
<PAGE>   51
                               INDEX TO EXHIBITS



<TABLE>
<CAPTION>
       Exhibit
       Number             Description of Document
       ------             -----------------------
<S>                       <C>
       2.1(6)             Agreement and Plan of Reorganization dated November 5,
                          1997 by and among the Company, Nexcom Technology, Inc.
                          and certain shareholders of Nexcom Technology, Inc.

       3.1(2)             Restated Certificate of Incorporation of Registrant.

       3.3(1)             Bylaws of Registrant.

       4.2(1)             Form of Common Stock Certificate.

       10.1(1)            Form of Indemnification Agreement.

       10.2(1)***         Form of 1993 Employee Stock Purchase Plan, as amended,
                          and form of Subscription Agreement.
 
       10.3(1)***         Form of 1989 Stock Plan, as amended, and form of Stock
                          Option Agreements.

       10.4(1)            Information and Registration Rights Agreement dated as
                          of March 17, 1993 among the Registrant and certain
                          holders of the Registrant's Common Stock, as amended.

       10.5(1)*           Letter Agreement dated September 14, 1994 between
                          Taiwan Semiconductor Manufacturing Company, Ltd.
                          ("TSMC") and the Registrant.
 
       10.6(1)*           Joint Development Contract between Chartered
                          Semiconductor Manufacturing Pte.Ltd. and the
                          Registrant dated July 21, 1994.

       10.7(1)            Subscription and Shareholders Agreement Relating to
                          Valery Limited dated March 30, 1994.

       10.8(1)            Long term line of credit between Bank of Communication
                          and Registrant.

       10.9(1)            Short term line of credit between International
                          Commercial Bank of China and Registrant.

       10.10(1)***        1995 Director Stock Option Plan.

       10.11(2)*          Option I Agreement between the Registrant and TSMC
                          dated April 21, 1995.

       10.12(2)*          Option II Agreement between the Registrant and TSMC
                          dated April 21, 1995.

       10.13(3)*          UMC/ISSI-Taiwan Foundry Venture Agreement dated August
                          31, 1995.

       10.14(3)*          UMC/ISSI-Taiwan Fabven Foundry Capacity Agreement
                          dated August 31, 1995.

       10.15              Second Amended and Restated Limited Liability Company
                          Agreement of WaferTech, LLC, a Delaware limited
                          liability company, dated as of October 28, 1997.
</TABLE>

<PAGE>   52
<TABLE>
<CAPTION>
<S>                       <C>
       10.16(4)**         Purchase Agreement by and between Taiwan Semiconductor
                          Manufacturing Corporation, as Seller, and Analog
                          Devices, Inc., Altera Corporation and Integrated
                          Silicon Solution, Inc., as Buyers.

       10.17(5)*          Amendment to Option I and Option II Agreement between
                          the Company and TSMC dated September 23, 1996.

       10.18(5)           Sublease Agreement for facility located at 2231 Lawson
                          Lane, Santa Clara, California.

       10.19(7)***        Nonstatutory Stock Plan.

       10.20***           1998 ISSI-Taiwan Stock Plan.

       21.1(1)            Subsidiaries of the Registrant.

       23.1               Consent of Ernst & Young LLP, Independent Auditors.

       24.1               Power of Attorney (see page 47).

       27.1               Financial Data Schedule.
</TABLE>

----------

*      Confidential treatment granted for certain portions of this exhibit.

**     Confidential treatment requested for certain portions of this exhibit.
       The portions of this exhibit for which confidential treatment is being
       requested have been blacked out in the copies filed with the related
       report and the confidential portions so omitted have been filed
       separately with the Securities and Exchange Commission.

***    Management contract or compensatory plan or arrangement required to be
       filed as an exhibit to this Report on Form 10-K pursuant to form 14(c) of
       this report.

(1)    Incorporated by reference to the Company's Registration Statement on Form
       S-1, as amended (file no. 33-72960).

(2)    Incorporated by reference to the Company's Registration Statement on Form
       S-1, as amended (file no. 33-91520).

(3)    Incorporated by reference to the Company's Annual Report on Form 10-K for
       the period ended September 30, 1995.

(4)    Incorporated by reference to the Company's Quarterly Report on Form 10-Q
       for the period ended June 30, 1996.

(5)    Incorporated by reference to the Company's Annual Report on Form 10-K for
       the period ended September 30, 1996.

(6)    Incorporated by reference to the Company's Annual Report on Form 10-K for
       the period ended September 30, 1997.

(7)    Incorporated by reference to the Company's Registration Statement on Form
       S-8 filed April 30, 1997.